Answer each of the following independent questions
1. Alex Meir recently won a lottery and has the option of receiving one of the following three prizes.
(1) 64,000 cash immediately,
(2) $20,000 cash immediately and six-period annuity of $8,000 beginning one year from today,
(3) a six period annuity of $8,000 beginning one year from today, or
(4) a six year period annuity of $13,000 beginning one year from today.
Assuming an interest rate of 6%, which option would Alec choose?
2. The Weiner Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2020. Weiner will make annual deposits of $100,000 into a special bank account at the end of each of 10 years beginning December 31, 2011. Assuming that the banks pays 7% interest compounded annually, on December 30, 2014 what will be the fund balance after the last payment?
This solution responds to two questions. First, it illustrates how to evaluate alternative payout options by computing the present values of several annuities and comparing those to a lump-sum. It then illustrates how to compute the future value of an annuity.