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    Calcuating present/future values

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    As winner of a breakfast cereal competition, you can choose one of the following prizes:
    a. $100,000 now.
    b. $180,000 at the end of five years.
    c. $11,400 a year forever.
    d. $19,000 for each of 10 years.
    e. $6,500 next year and increasing thereafter by 5 percent a year forever.

    If the interest rate is 12 percent, which is the most valuable prize?

    Notes: a. is a present value, b. is a future value c. is a simple perpetuity. d. is an annuity and e. is a growing perpetuity. Translate b, c, d, and e into present values to be able to select the most valuable prize.

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    Solution Preview

    b. PV = FV/(1 + r)n where FV is the future value
    PV is the present value
    r is the interest rate
    n is the number of year

    PV = 180,000/(1.12)5
    = 102,136.83

    c. PV = Value/r
    = ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer if the interest rate is 12 percent, which is the most valuable prize.