You have been given a choice between two retirement policies as described below.
Policy A: You will receive equal annual payments of $10,000 beginning 35 years from now for ten years.
Policy B: You will receive one lump sum of $100,000 in 40 years from now.
Which policy would you select? Suppose rate of interest is six percent.
Compute the present value of the following stream of cash flows, suppose that the firm's opportunity cost is fifteen percent.
|
Years
|
Amount
|
|
1-7
|
$12,000
|
|
8-10
|
14,000
|
Jeanne has just graduated from high school and has received an award for $5,000. She would like to deposit the money in an interest earning account until she graduates from college [i.e., four years from now]. In her search for the highest interest earning account, she has narrowed the list down to the following two accounts:
[A] bank A pays nine percent interest compounded annually, and
[B] bank B pays eight percent interest compounded semi annually. Which is the better offer, and how much will Jeanne have upon graduation from college?