Sydney wins a prize. She has a choice of receiving a payment of $160,000 immediately or of receiving a deferred perpetuity with $10,000 annual payments, the first payment occurring in exactly four years. Which has a greater present value if the calculation is based on an annual effective interest rate of 5%? How about if the annual effective rate used is 6%? What real life considerations should enter into Sydney's choice besides maximizing her present value?

Instructions are listed below

Explanation:

Giving the following information:

She has a choice of receiving a payment of $160,000 immediately or of receiving deferred perpetuity with $10,000 annual payments, the first payment occurring in exactly four years.

A) i = 5%

First, we need to determine the value of the perpetuity four years from now.

Perpetuity = 10,000/0.05 = 200,000

Now, we can calculate the present value:

PV = 200,000 / (1.05^4) = $164,540.50

B) i = 6%

Perpetuity = 10,000/0.06 = $166,666.67

PV = $166,666.67/1.06^4 = $132,015.61

C) She should consider her necessities of cash and the value of the products she can purchase now.