BUSI 320 Comprehensive Problem 3 2016 Summer B
Use what you have learned about the time value of money to analyze each of the following decisions:
Decision #1: Which set of Cash Flows is worth more now?
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 $ 7500 today.
Option B: Receive a $1000 gift each year for the next 10 years. The first $1000 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 $__7500________ today.
Option B would be worth $__8530.20________ today. 1000*(1-(1+3%)10-10)/3%
Option C would be worth $__10417.31________ today. 14000*(1+3%)10-10
Financial theory supports choosing Option __B_____
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 $___7500_______ today.
Option B would be worth $___7023.59_______ today. 1000*(1-(1+7%)10-10)/7%
Option C would be worth $___7116.89_______ today. 14000*(1+7%)10-10
Financial theory supports choosing Option _A______
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 $__7500________ today.
Option B would be worth $___6144.57_______ today. 1000(1-(1+10%)10-10)/10%
Option C would be worth $__5397.61________ today....