Present value and interest rate questions
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1. Would you rather receive $1,000 a year for 10 years or $800 a year for 15 years if: A) your interest rate is 5%? B) Same question, but your interest rate is 20%?
2. What is the present value of the following three year cash-flow stream if your interest rate is 6%.... Year 1 $200, Year 2 is $400 then Year 3 of $300 ?
3. A famous Quarterback just signed a $15 million contract providing $3 million a year for 5 years. A less-famous receiver signed a $14 million, 5-year contract providing $4 million now plus $2 million a year for 5 years. Who is better paid, with an interest rate of 10%? How much and why?
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Solution Summary
The solution answers three questions regarding solving for present values and interest rates.
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1. Would you rather receive $1,000 a year for 10 years or $800 a year for 15 years if:
A) your interest rate is 5%?
PV Factor for $1,000 annuity with n = 10, and i = 0.05 = 7.7217
PV = $1,000 × 7.7217 = $7,721.7
PV Factor for $800 annuity with n = 15, and i = 0.05 = 10.3797
PV = $800 × 10.3797 = $8,303.76
Since the $800 annuity has a higher PV, then I would rather ...
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