Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $60,000 cash immediately, (2) $18,000 cash immediately and a six-period annuity of $7,500 beginning one year from today, or (3) a six-period annuity of $11,800 beginning one year from today. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Assuming an interest rate of 5%, determine the present value for the above options. Which option should Alex choose? 2. The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2030. Weimer will mak annual deposits of $105,000 into a special bank account at the end of each of 10 years beginning December 31, 2021. Assuming that the bank account pays 6% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2030? Answer is not complete.
Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $60,000 cash immediately, (2) $18,000 cash immediately and a six-period annuity of $7,500 beginning one year from today, or (3) a six-period annuity of $11,800 beginning one year from today. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Assuming an interest rate of 5%, determine the present value for the above options. Which option should Alex choose? 2. The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2030. Weimer will mak annual deposits of $105,000 into a special bank account at the end of each of 10 years beginning December 31, 2021. Assuming that the bank account pays 6% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2030? Answer is not complete.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $60,000 cash immediately, (2)
$18,000 cash immediately and a six-period annuity of $7,500 beginning one year from today, or (3) a six-period annuity of $11,80O
beginning one year from today. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use approprlate factor(s) from
the tables provided.)
1. Assuming an interest rate of 5%, determine the present value for the above options. Which option should Alex choose?
2. The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2030. Weimer will make
annual deposits of $105,000 into a special bank account at the end of each of 10 years beginning December 31, 2021. Assuming that
the bank account pays 6% interest compounded annually, what will be the fund balance after the last payment is made on December
31, 2030?
Answer is not complete.
Complete this question by entering your answers in the tabs below.
Required 1
Required 2
Assuming an interest rate of 5%, determine the present value for the above options. Which option should Alex choose? (Round
your final answers to nearest whole dollar amount.)
Annuity
Payment
Immediate
Cash
PV Annuity
PV Option
Option 1
$
60,000
IS
60,000
+
Option 2
24
7,500
2$
18,000
I$
18,000
Option 3
Which option should Alex
choose?
11,800
%3D
Required 2
Expert Solution
Answer
Option 1
Since the entire payment will be received today, it's present value will be equal to the amount to be received, i.e., $ 60,000.
Option 2
Present value = $ 18,000 + ($ 7,500 x present value of annuity factor at 5% for 6 years)
Present value = $ 18,000 + ($ 7,500 x 5.076)
Present value= $ 56,070
Option 3
Present value = $ 11,800 x present value of annuity factor at 5% for 6 years
Present value = ($ 11,800 x 5.076)
= $ 59,897
Decision: Since the present value of Option 1 is the highest, Option 1 should be selected.
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