E116 Comparing Options Using Present Value Concepts LO 11s1

E11-6 Comparing Options Using Present Value Concepts [LO 11-s1] After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large, well-known magazine subscription company. It has arrived with the good news that you are the big winner, having won $21 million. You have three options. (a) Receive $1.05 million per year for the next 20 years. (b) Have S8.25 million today (c) Have $2.25 million today and receive ST50,000 for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to eam 13 percent on investments. Required: 1. Calculate the present value of each option. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factoris) from the tables provided. Enter your answers in dollars, not in millions.) Present Value Option A Option B Option C 2. Determine which option you prefer Option Option EB Opion A Hints References eBook&Resources; Hint#1 Ask your instructor aquestion Check my work

Solution

1) Calculate present value :

Option A = 1050000*7.025 = 7376250

Option B = 8250000*1 = 8250000

Option C = (2250000*1+750000*7.025) = 7518750

2) Option B is better you prefer