Which set of Cash Flows is worth more now? Assume that your grandmother wants to

Question

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 $16,50010 years from today. Compute the Present Value of each of these options if you expect the interest rate to be 2% annually for the next 10 years. Which of these options does financial theory suggest you should choose? Option A would be worth $_ today. Option B would be worth $_ today. Option C would be worth $_ today. Financial theory supports choosing Option Compute the Present Value of each of these options if you expect the interest rate to be 5% annually for the next 10 years. Which of these options does financial theory suggest you should choose? Option A would be worth $_ today. Option B would be worth $_today. Option C would be worth $_ today. Financial theory supports choosing Option Compute the Present Value of each of these options if you expect to be able to earn 7% annually for the next 10 years. Which of these options does financial theory suggest you should choose? Option A would be worth $_ today. Option B would be worth $_ today. Option C would be worth $_ today. Financial theory supports choosing Option

Explanation / Answer

Assignement 1

1)

Option A would be worth today = $ 10000

Option B would be worth today = Annual Payment*(1-(1+r)^-n)/r

Option B would be worth today = 1500*(1-(1+2%)^-10)/2%

Option B would be worth today = $ 13,473.88

Option C would be worth today = Amount in 10 year*(1+r)^-n)

Option C would be worth today = 16500*(1+2%)^-10

Option C would be worth today = $ 13,535.75

Financial Theory Support choosing Option C

2)

Option A would be worth today = $ 10000

Option B would be worth today = Annual Payment*(1-(1+r)^-n)/r

Option B would be worth today = 1500*(1-(1+5%)^-10)/5%

Option B would be worth today = $ 11,582.60

Option C would be worth today = Amount in 10 year*(1+r)^-n)

Option C would be worth today = 16500*(1+5%)^-10

Option C would be worth today = $ 10,129.57

Financial Theory Support choosing  Option B

3)

Option A would be worth today = $ 10000

Option B would be worth today = Annual Payment*(1-(1+r)^-n)/r

Option B would be worth today = 1500*(1-(1+7%)^-10)/7%

Option B would be worth today = $ 10,535.37

Option C would be worth today = Amount in 10 year*(1+r)^-n)

Option C would be worth today = 16500*(1+7%)^-10

Option C would be worth today = $ 8387.76

Financial Theory Support choosing  Option B

Note : Please donot ask multiple question in single question , please ask seperately

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