14 September, 13:51

# 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 \$ 10,000 today. Option B: Receive a \$1500 gift each year for the next 10 years. The first \$1500 would be received 1 year from today. Option C: Receive a one-time gift of \$18,000 10 years from today.

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1. 14 September, 13:58
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Option A is the more convinient.

Explanation:

Giving the following information:

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 \$1500 gift each year for the next 10 years. The first \$1500 would be received 1 year from today. Option C: Receive a one-time gift of \$18,000 10 years from today.

We will assume a discount rate of 10%.

Option A:

Present value = \$10,000

Option B:

Final value = {A*[ (1+i) ^n-1]}/i

A = annual deposit

FV = {1500*[ (1.10^10) - 1]/0.10 = 23,906.14

PV = FV / (1+i) ^n

PV = 23,906.14/1.10^10 = \$9,216.85

Option C:

PV = 18,000/1.10^10 = \$6,939.80