Sydney wins a prize. she has a choice of receiving a payment of $160,000 immediately or of receiving a deferred perpetuity with $10,000 annual payments, the first payment occurring in exactly four years. which has a greater present value if the calculation is based on an annual effective interest rate of 5%? how about if the annual effective rate used is 6%? what real life considerations should enter into sydney’s choice besides maximizing her present value?

Instructions are listed below

Explanation:

Giving the following information:

She has a choice of receiving a payment of $160,000 immediately or of receiving deferred perpetuity with $10,000 annual payments, the first payment occurring in exactly four years.

A) i= 5%

First, we need to determine the value of the perpetuity four years from now.

Perpetuity= 10,000/0.05= 200,000

Now, we can calculate the present value:

PV= 200,000/(1.05^4)= $164,540.50

B) i= 6%

Perpetuity= 10,000/0.06= $166,666.67

PV= $166,666.67/1.06^4= $132,015.61

C) She should consider her necessities of cash and the value of the products she can purchase now.

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