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Assume that your grandmother wants to give you a 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 $18,000 10 years from today. Compute the Present Value of each of these options if you expect the interest rate to be 3% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Respuesta :

The present value for option:

A = $10,000, B =  $12,795.30, C =  $13,393.69

Financial theory would suggest I pick option C

Present value is the value today of a series of cash flows discounted at their interest rate.

Present value of option A = $10,000

Present value of option B :

(1500 ÷ 1.03) + (1500 ÷ 1.03²) + (1500 ÷ 1.03³) + (1500 ÷ 1.03^4) + (1500 ÷ 1.03^5) + (1500 ÷ 1.03^6) + (1500 ÷ 1.03^7) + (1500 ÷ 1.03^8) + (1500 ÷ 1.03^9) + (1500 ÷ 1.03^10) = $12,795.30

Present value of option C : 18,000 ÷ 1.03^10 = $13,393.69

Financial theory would suggest I pick the option with the highest present value.  

A similar question was solved here: brainly.com/question/9641711?referrer=searchResults

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