Question

Please help me with the process and formulas

Example #12: An alumnus of M.I.T who "made good" has decided to donate to the college's Excellence Fund and has offered the college any one of the following three plans: Plan A:$60,000 now Plan B:$16,000 per year for 12 years beginning 1 year from now Plan C: $50,000 three years from now and another $80,000 five years from now The only condition placed on the donation is that the college agrees to append the money on research related to the advancement of robotics. The college would like to select the plan which maximizes the buying power of the dollars received, so it has instructed one industrial engineer student evaluating the plans to account for inflation in their calculations. If the college can eam 12% per year on its ready-assets account and the inflation rate is expected to be 11% per year, which plan should the college accept? Solution

Answer 1

Ans) To compare all the options we need to find their Present values and choose the option which has highest present value thereby being the most beneficial for college.

A = $ 60,000

B= $

We use the following formula for it. Also the real interest rate = nominal interest rate- inflation rate

= 12%- 11%= 1 %