Question

You have a rich aunt who wants to give you money. She offers you two choices: Choice 1: You receive $100 starting today once a year every year for the rest of eternity. Choice 2: You receive $200 today and then $50 once a year starting next year for all of eternity. Assuming the interest rate

Answer 1

Answer:

Choice 1 is more profitable.

Explanation:

Giving the following information:

Choice 1:

You receive $100 starting today once a year every year for the rest of eternity.

Choice 2:

You receive $200 today and then $50 once a year starting next year for all of eternity.

I will assume an interest rate of 8%

The first option and second option are a perpetual annuity. To calculate the present value, we need to use the following formula:

Choice 1:

PV= Cf/i

Cf= 100

i=0.08

PV= 100/0.08= $1,250

Choice 2:

PV= 50 + 50/0.08= $825

Choice 1 is more profitable.