Question

9. Your grandfather would like to share some of his fortune with you. He offers to give you money under one of the following scenarios (you get to choose): (Click the icon to view the scenarios.) 2(Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) 4(Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value Ordinary of Annuity of $1 table.) Read the requirements Requirement 1. Calculate the present value of each scenario using a 6% discount rate. Which scenario yields the highest present value? Round to the nearest dollar. Begin by calculating the present value of each scenario using a 6% discount rate. (Round the amounts to the nearest dollar.) Present Value Scenario 1: Scenario 2: Scenario 3: ( 14 appears to be the best option. Based on a 6% discount rate, its present value is the (2) Requirement 2. Would your preference change if you used a 12% discount rate? Begin by calculating the present value of each scenario using a 12% discount rate. (Round the amounts to the nearest dollar.) Present Value Scenario 1: Scenario 2: Scenario 3: Using a 12% discount rate (3) - change the preference in this problem. 1: More Info 1. 2. 3. $8,750 per year at the end of each of the next six years $49,650 (lump sum) now $100,450 (lump sum) six years from now

Answer 1

If interest rate is 6%:

Scenario 1:

Present Value = $8,750 * PVA of $1 (6%, 6)
Present Value = $8,750 * 4.917
Present Value = $43,024

Scenario 2:

Present Value = $49,650

Scenario 3:

Present Value = $100,450 * PV of $1 (6%, 6)
Present Value = $100,450 * 0.705
Present Value = $70,817

Scenario 3 appears to be the best option. Based on a 6% discount rate, its present value is the highest.

If interest rate is 12%:

Scenario 1:

Present Value = $8,750 * PVA of $1 (12%, 6)
Present Value = $8,750 * 4.111
Present Value = $35,971

Scenario 2:

Present Value = $49,650

Scenario 3:

Present Value = $100,450 * PV of $1 (12%, 6)
Present Value = $100,450 * 0.507
Present Value = $50,928

Using a 12% discount rate would not change the preference in this problem.