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Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $90,000 cash immediately, (2) $35,000 cash immediately and a six-period annuity of $9,400 beginning one year from today, or (3) a six-period annuity of $17,700 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 make annual deposits of $180,000 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?

Sagot :

Based on the annuities calculated, he should choose option 1.

How to calculate the annuities?

Present value = $35,000 + (Annuity amount * Present value of an ordinary annuity of $1)

= $35,000 + ($9,400 * (5%,6))

= $35,000 + ($9,400 * 5.07569)

= $35,000 + 47,711

= $82,711

Present value = (Annuity amount * Present value of an ordinary annuity of $1)

= $17,700 * (5%,6)

= $17,700 * 5.07569

= $89,840

Alex should choose Option 1

Future value annuity = Annuity amount * Future value of an ordinary annuity of $1

= $180,000 * (6%,10)

= $180,000 * 13.1808

= $2,372,544

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