Assume that your grandmother wants to give you generous gift. She wants you to c
ID: 2645795 • 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 to be able to earn 10% 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
Working
Present Value of Option A = 10000
Present Value of Option B = 1600/1.1 + 1600/1.1^2 + 1600/1.1^3+ 1600/1.1^4+ 1600/1.1^5+ 1600/1.1^6+ 1600/1.1^7+ 1600/1.1^8+ 1600/1.1^9+ 1600/1.1^10
Present Value of Option B = $ 9831.31
Present Value of Option C = 20000/1.1^10
Present Value of Option C = $ 7710.87
Answer
Option A would be worth $10,000 today.
Option B would be worth $9831.31 today.
Option C would be worth $_7710.87_ today.
Financial theory supports choosing Option _A______