An alumnus of MIT who made good has decided to donate to the

An alumnus of M.I.T who made good has decided to donate to the colleges Excellence Fund and has offered the college any one of the following three plans:

Plan A: Plan B: Plan C:

$60,000 now
$16,000 per year for 12 years beginning 1 year from now
$50,000 three years from now and another $80,000 five years from now

The only condition placed on the donation is that the college agrees to append the money on research related to the advancement of robotics. The college would like to select the plan which maximizes the buying power of the dollars received, so it has instructed one industrial engineer student evaluating the plans to account for inflation in their calculations. If the college can earn 12% per year on its ready-assets account and the inflation rate is expected to be 11% per year, which plan should the college accept?

Solution

Calculate Present value for each plan and compare

PV for plan A is $60,000

PV for plan B is calculated below-

PV = 16,000 (1 – 1/ (1.2432)¹²)/ 0.2432

PV = $60,962.62

PV for plan C is calculated below-

PV = 50,000 /(1.2432)³ + 80,000/(1.2432)⁵

       = $26,022.38 + $26,939.22

    = $ 52,961.6

Hence, it can be say that Plan B is highest than other plan. So college should accept plan B.