Ask Question
24 August, 04:56

You have a rich aunt who wants to give you money. She offers you two choices: Choice 1: You receive $100 starting today once a year every year for the rest of eternity. Choice 2: You receive $200 today and then $50 once a year starting next year for all of eternity. Assuming the interest rate

+5
Answers (1)
  1. 24 August, 05:28
    0
    Choice 1 is more profitable.

    Explanation:

    Giving the following information:

    Choice 1:

    You receive $100 starting today once a year every year for the rest of eternity.

    Choice 2:

    You receive $200 today and then $50 once a year starting next year for all of eternity.

    I will assume an interest rate of 8%

    The first option and second option are a perpetual annuity. To calculate the present value, we need to use the following formula:

    Choice 1:

    PV = Cf/i

    Cf = 100

    i=0.08

    PV = 100/0.08 = $1,250

    Choice 2:

    PV = 50 + 50/0.08 = $825

    Choice 1 is more profitable.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “You have a rich aunt who wants to give you money. She offers you two choices: Choice 1: You receive $100 starting today once a year every ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers