Appendix B: http://lectures.mhhe.com/connect/0073530727/Images/Appendix_B.jpg Yo
ID: 2494293 • Letter: A
Question
Appendix B: http://lectures.mhhe.com/connect/0073530727/Images/Appendix_B.jpg
Your grandfather has offered you a choice of one of the three following alternatives: $9,500 now, $4,000 a year for seven years or $57,000 at the end of seven years. Use Appendix B and AppendixD (a-1) Assuming you could earn 10 percent annually, compute the present value for the following amounts? (Round "PV Factor" to 3 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.) Present value $9,500 $4,000 $57,000 (a-2) Which alternative should you choose? $57,000 received at end of seven years $4,000 received each year for seven years $9,500 received now (b-1) If you could earn 11 percent annually, compute the present value for the following amounts? (Round "PV Factor" to 3 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.) Present value $9,500 $4,000 $57,000 (b-2) Which alternative should you choose? $57,000 received at end of seven years $4,000 received each year for seven years $9,500 received nowExplanation / Answer
(‘a-1)- Present Value when rate is 10 %
Present Value of 9500 -
= 9500 x 1
=$9500
Present Value of $4000 received for 7 year at the end of each year
= 4000 x PVIFA @ 10 % for 7 year
= 4000 x 4.868
= $19472
Present Value of $ 57,000 received at the end of 7 years.
= 57000 x PVF for 7th year @10 %
= 57,000 x 0.513
= $29,241
(‘a-2)-
Considering the highest present value I will choose to receive the $ 57,.000 at the end of 7th year.
(‘b-1)- Present Value when rate is 11 %
Present Value of 9500 -
= 9500 x 1
=$9500
Present Value of $4000 received for 7 year at the end of each year
= 4000 x PVIFA @ 11 % for 7 year
= 4000 x 4.712
= $18,848
Present Value of $ 57,000 received at the end of 7 years.
= 57000 x PVF for 7th year @11 %
= 57,000 x 0.482
= $27,474
(‘b-2)-
Considering the highest present value I will choose to receive the $ 57,.000 at the end of 7th year.
Notes / Assumption- In absence of specific information it is assumed that $ 4000 will be received for 7 year at the year end of each year.
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