Question

10. Your grandmother offered you a choice of gifts: you could receive either $10,000 today, or $2,000 per year at the end of each of the next six years. Assuming a discount rate of 5%, which gift is worth more today?

Answer 1

Answer:

Receiving $2,000 every year for 6 years is worth more today.

Explanation:

$2,000 received per year is annuity as same amount is received every year.

Given:

Amount received every year = $2,000

Time period = 6 years

Rate = 5%

Check PVIFA (Present value of annuity factor) table for 5% and 6 years, we get 5.0757

Present value of annuity = 2,000 × 5.0757

                                       = $10,151.4

Receiving $2,000 every year for 6 years is worth more today than receiving $10,000 today as present value of annuity is worth $10,151.4 today which is more than $10,000.

So, $2,000 every year is worth more today.