Your would like to share some of fortune with you. offers to give you money under one of the following scenarios (you get to choose): 1. a year at the end of each of the next years 2. (lump sum) now 3. (lump sum) years from now Calculate the present value of each scenario using % interest rate. Which scenario yields the highest present value? Would your preference change if you used a % interest rate?

Answer and Explanation:

The computation is shown below:

1. In the case when the rate of interest is 6%

So, the present value is

1. For at the end of eight years, the present value of $7,000 is

= $7,000 × 6.20979

= $434,68.53 or $43,469

2. The lumpsum now is $45,000

3. The eight years from now is

= $75,000 × 0.62741

= $47,00,55.75 or $47,056

Thus, the highest present value = $47,056

2.   In the case when the rate of interest is 12%

1.  For at the end of eight years, the present value of $7,000 is

= $7,000 × 4.96764

= $34,773.48 or $34,773

2. The lumpsum now is $45,000

3. The eight years from now is

= $75,000 × 0.40388

= $30,291

Thus, the highest present value = $45,000

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