Answer:
The best option is the first one. It provides a higher present value.
Step-by-step explanation:
Giving the following information:
<u>Option 1:</u>
Receive $15,000,000 today.
<u>Option 2:</u>
Receive $1,000,000 for 30 years.
Discount rate= 7% compounded annually
T<u>o compare both options, we need to calculate the present value of Option 2. The option with the higher present value is the most convenient.</u>
<u>Option 2:</u>
First, we need to determine future value:
FV= {A*[(1+i)^n-1]}/i
A= annual cash flow
FV= {1,000,000*[(1.07^30) - 1]} / 0.07
FV= $94,460,786.32
Now, the present value:
PV= FV/(1+i)^n
PV= 94,460,786.32 / (1.07^30)
PV= $12,409,041.18
The best option is the first one. It provides a higher present value.
