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.) 1. Assuming an interest rate of 6%, determine the present value for the above options. Which option should Alex choose

Answer 1

Answer:

(1) $64,000

$59,338.60

3. $63,925.22

He would choose the first option because it has the highest present value

Explanation:

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Option 2

Cash flow in year 0 = $64,000

Cash flow each year from year 1 to 6 = $20,000

I = 6%

pv = $59,338.60

Option 3

Cash flow each year from year 1 to 6 = $13,000

I = 6%

pv = $63,925.22

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute