Assume that your grandmother wants to give you generous gift. She wants you to c
ID: 2645794 • Letter: A
Question
Assume that your grandmother wants to give you generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive:
Option A: Receive a one-time gift of $10,000 today.
Option B: Receive a $1600 gift each year for the next 10 years. The first $1600 would be
received 1 year from today.
Option C: Receive a one-time gift of $20,000 10 years from today.
Compute the Present Value of each of these options if you expect the interest rate to be 7% annually for the next 10 years. Which of these options does financial theory suggest you should choose?
Option A would be worth $__________ today.
Option B would be worth $__________ today.
Option C would be worth $__________ today.
Financial theory supports choosing Option _______
Explanation / Answer
Option A
P.V=$10000
Option B
P.V=1600*Annuity factor (7%@10years)=1600*7.024=11238.4
Option C
P.V=20000/ (1.07^10) = 10166.99
Option A would be worth $10000 today.
Option B would be worth $11238.4 today.
Option C would be worth $10167 today.
Financial theory supports choosing Option B as it has highest NPV