Quick answer please 100 correct Calculate Present value of

Quick answer please 100% correct .

Calculate Present value of option 1 and option 2

Calculate Present value of option 1 and option 2

Use the following information to answer the next 3 questions: Barney just received an inheritance and has been given the choice of two payout options: Option #1: He can receive $12,500 every quarter for twenty years. Option #2: He can wait and receive $14,500 every quarter for twenty years with the first payment coming three quarters from now. The appropriate discount rate is 9 percent compounded quarterly.

Solution

Answer:

Annual Interest Rate = 9%
Quarterly Interest Rate = 2.25%

Option 1:

Quarterly Payment = $12,500

Present Value = $12,500/1.0225 + $12,500/1.0225^2 + $12,500/1.0225^3 + ... + $12,500/1.0225^80
Present Value = $12,500 * (1 - (1/1.0225)^80) / 0.0225
Present Value = $12,500 * 36.94978
Present Value = $461,872.25

Option 2:

Quarterly Payment = $14,500

Present Value = $14,500/1.0225^3 + $14,500/1.0225^4 + $14,500/1.0225^5 + ... + $14,500/1.0225^82
Present Value = ($14,500/1.0225^2) * (1 - (1/1.0225)^80) / 0.0225
Present Value = ($14,500/1.0225^2) * 36.94978
Present Value = $14,500 * 35.34152
Present Value = $512,452.04