Assume that your grandmother wants to give you generous gift. She wants you to c
ID: 2735026 • 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 $ 7,500 today.
Option B: Receive a $1,300 gift each year for the next 10 years. The first $1300 would be received 1-year from today.
Option C: Receive a one-time gift of $14,000 10 years from today.
Compute the Present Value of each of these options if you expect the interest rate to be 3% 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 would be worth 7500 today
Option B would be worth 11089.26
Option C would be worth 10417.31
14000*0.74 i.e 10417.31
Financial theory supports choosing Option B
Year Cash Flows PVF @ 3% PV 1 1300 0.97 1,262.14 2 1300 0.94 1,225.37 3 1300 0.92 1,189.68 4 1300 0.89 1,155.03 5 1300 0.86 1,121.39 6 1300 0.84 1,088.73 7 1300 0.81 1,057.02 8 1300 0.79 1,026.23 9 1300 0.77 996.34 10 1300 0.74 967.32 Total 11,089.26