n Layout References Mailings Review View B. Barb has been offered money from her
ID: 2338686 • Letter: N
Question
n Layout References Mailings Review View B. Barb has been offered money from her parents. Her parents will give her $35,000 at the end of the fifth year or either of the two other options. Assuming she can invest at an interest rate of 5% which of the three options will give her the most money five years from now? Show calculations for the value of each option 1. Receive $28,000 now (which she can invest for 5 years) 2. Receive S6,000 at the end of each year for 5 years, which she can invest as she receives each amount. 3. Receive the $35,000 at the end of year five as described above. Show your work and answers below: ords English (United Statesi Focus Top storiesExplanation / Answer
Evaluation of three options
Option1- Receive $28,000 now
Interest rate = 5%
Time period = 5 years
CVF(5%, 5) = Compound value factor at 5% for 5 years
Future value = Present value x CVF(5%, 5)
= 28,000 x 1.276
= $35,728
Option 2- $6,000 at the end of each year for 5 years
CVAF(5%, 5) = Compound value annuity factor at 5% for 5 years
Future value = Annuity x CVAF(5%, 5)
= 6,000 x 5.526
= $33,156
Option 3- Receive $35,000 at the end of 5 years
Future value = $35,000
Conclusion- Since future value is highest in option 1, hence she must choose option 1 to get maximum money.
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