You have a rich aunt who wants to give you money. She offers you two choices: Choice 1: You receive $100 starting today once a year every year for the rest of eternity. Choice 2: You receive $200 today and then $50 once a year starting next year for all of eternity. Assuming the interest rate

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Phoenix Gonzalez

Business

25 January, 03:47

You have a rich aunt who wants to give you money. She offers you two choices: Choice 1: You receive $100 starting today once a year every year for the rest of eternity. Choice 2: You receive $200 today and then $50 once a year starting next year for all of eternity. Assuming the interest rate

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Nico · Answer 1

Choice 1 is more profitable.

Explanation:

Giving the following information:

Choice 1:

You receive $100 starting today once a year every year for the rest of eternity.

Choice 2:

You receive $200 today and then $50 once a year starting next year for all of eternity.

I will assume an interest rate of 8%

The first option and second option are a perpetual annuity. To calculate the present value, we need to use the following formula:

Choice 1:

PV = Cf/i

Cf = 100

i=0.08

PV = 100/0.08 = $1,250

Choice 2:

PV = 50 + 50/0.08 = $825

Choice 1 is more profitable.