Question

Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $64,000 cash immediately, (2) $20,000 cash immediately and a six-period annuity of $8,000 beginning one year from today, or (3) a six-period annuity of $13,000 beginning one year from today. (FV of $1, PV of $1,FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Answer 1

Answer:

the option with the highest present value is option 3 with a present value of $63,925

Explanation:

option 1)

$64,000 now, so that is its present value

option 2)

$20,000 cash now + 6 annual payments of $8,000 (6%) interest rate = $20,000 x ($8,000 x 4.9173 (PV annuity factor, 6%, 6 periods) = $20,000 + $39,338 = $59,338

option 3)

6 annual payments of $13,000 (6%) interest rate = $13,000 x 4.9173 (PV annuity factor, 6%, 6 periods = $63,925