DISCLAIMER ANSWER CHOICE B IS NOT NECESSARILY THE CORRECT A

DISCLAIMER - ANSWER CHOICE \"B\" IS NOT NECESSARILY THE CORRECT ANSWER, IT\'S JUST THE ANSWER I HAVE SELECTED FOR RIGHT NOW

Please show work, and if possible show inputs on a finance calculator.

Which one of the following options do you prefer? Use an annual discount rate of 12%. O (a) Receiving $100 now for free! (b) Receiving S30 at the end of each year for 10 years, but you have to pay $100 now to purchase this right. O (c) Receiving $20 at the end of each year for 10 years, for free. O (d) Receiving $50 now for free

Solution

Correct option is > (c) Receiving $20 at end of each year for 10 years for free

Option (c) has highest NPV i.e $113.00.

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We can select project on merit of highest NPV:

Option A:

NPV = 100

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Option B:

NPV = Investment + Payment x ((1-(1+Rate)^-Years))/Rate)

NPV = -100 + 30 x ((1-(1+12%)^-10))/12%)

NPV = 69.51

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Option C:

NPV = Investment + Payment x ((1-(1+Rate)^-Years))/Rate)

NPV = 0 + 20 x ((1-(1+12%)^-10))/12%)

NPV = 113.00

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Option D:

NPV = 50