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.© BrainMass Inc. brainmass.com June 3, 2020, 9:48 pm ad1c9bdddf
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
c. PV = Value/r
This solution is comprised of a detailed explanation to answer if the interest rate is 12 percent, which is the most valuable prize.