- Your rich grandfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; $24,000 at the end of eight years. Assuming you could earn 11% annually, which alternative should you choose? If you could earn 12% percent annually, would you still choose the same alternative?
- You need $28, 974 at the end of 10 years, and your only investment outlet is an 8% long term certificate of deposit (compounded annually). With the COD, you make an initial investment at the beginning of the year.
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a. What single payment could be made at the beginning of the first year to achieve this objective?
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b. What amount could you pay at the end of each year annually for 10 years to achieve this objective?
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Solution Preview
- Your rich grandfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; $24,000 at the end of eight years. Assuming you could earn 11% annually, which alternative should you choose? If you could earn 12% percent annually, would you still choose the same alternative?
This is a calculation of present values of the three alternatives.
With 11% annual discount rate:
$10,000 now: PV1 = $10,000
$2,000 a year for eight years:
Payment = 2,000, Discount rate = 11%; number …
