Alex Meir recently won a lottery and has the option of receiving one of the foll

Question

Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $90,000 cash immediately, (2) $35,000 cash immediately and a six-period annuity of $9,400 beginning one year from today, or (3) a six-period annuity of $17,700 beginning one year from today. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Assuming an interest rate of 5%, determine the present value for the above options. Which option should Alex choose? 2. The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2027. Weimer will make annual deposits of $180,000 into a special bank account at the end of each of 10 years beginning December 31, 2018. Assuming that the bank account pays 6% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2027?

Explanation / Answer

1) Present value of the options Option 1 = $90000 Option 2 = $35000+($9400*PVIFA @5%, 6 years) = $35000+($9400*5.0757) = $35000+47711.51 = $827711.51 Option 3 = $17700*PVIFA @ 5%, 6 years = $17700*5.0757 = $89839.75 Alex should choose Option 1, because it gives maximum present value 2) Annual deposits = $180000 Interest rate = 6% (compounded annually) Periods = 10 years Fund balance after 10 years = $180000*FVIFA @ 6%, 10 years = $180000*13.9716 = $2514896

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