Calculation of future value, on a per dollar basis, of each of the two interest payment options.
"Part One Instructions:
The Chinese government is conducting an auction for a joint project involving oil exploration. Because of a desire for U.S. dollars, they require the winning bidder to make an up-front, one-time payment for the rights to join the project and supervise the work. The Chinese government will use the proceeds to cover all of the expenses during the life of the project. The winning bidder will receive a single payment at the end of the ten-year life of the project. This payment, based on the amount of the winning bid, will pay either simple interest of 15 percent annually or 10 percent annually compounded quarterly. Blue Mesa Oil's bid team has to help evaluate its $47 million bid. First, find out the future value, on a per dollar basis, of each of the two interest payment options. Next, compute the future value of the $47 million bid using each option, and determine which is bigger. \"
Option 1: Simple Interest 15% per year
|
|
|
Year
|
|
|
$47 mil
|
Start
|
1
|
2
|
|
dollar
|
$1.00
|
$1.15
|
$1.30
|
|
FV
|
$47,000,000.00
|
$54,050,000.00
|
$61,100,000.00
|
Cont:
|
|
|
|
|
|
3
|
4
|
5
|
6
|
|
$1.45
|
$1.60
|
$1.75
|
$1.90
|
|
$68,150,000.00
|
$75,200,000.00
|
$82,250,000.00
|
$89,300,000.00
|
Cont:
|
|
|
|
|
|
7
|
8
|
9
|
10
|
|
$2.05
|
$2.20
|
$2.35
|
$2.50
|
|
$96,350,000.00
|
$103,400,000.00
|
$110,450,000.00
|
$117,500,000.00
|
Option 2: 10% Interest Compounded Quarterly
That means 2.5% per quarter
|
|
|
Year
|
|
|
$47 mil
|
Start
|
1
|
2
|
|
dollar
|
$1.00
|
$1.10
|
$1.22
|
|
FV
|
$47,000,000.00
|
$51,879,205.86
|
$57,264,936.18
|
Cont:
|
|
|
|
|
|
3
|
4
|
5
|
6
|
|
$1.34
|
$1.48
|
$1.64
|
$1.81
|
|
$63,209,774.74
|
$69,771,764.17
|
$77,014,972.69
|
$85,010,119.63
|
Cont:
|
|
|
|
|
|
7
|
8
|
9
|
10
|
|
$2.00
|
$2.20
|
$2.43
|
$2.69
|
|
$93,835,265.88
|
$103,576,576.08
|
$114,329,159.84
|
$126,198,000.40
|
a .Recommendation: Which option is best for Blue Mesa?