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22. Your rich grandfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; $24,000 at the end of eight years. Assuming you could earn 11% annually, which alternative should you choose? If you could earn 12% percent annually, would you still choose the same alternative?

23. You need $28, 974 at the end of 10 years, and your only investment outlet is an 8% long term certificate of deposit (compounded annually). With the COD, you make an initial investment at the beginning of the year.

a. What single payment could be made at the beginning of the first year to achieve this objective?

b. What amount could you pay at the end of each year annually for 10 years to achieve this objective?

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Solution Preview

22. Your rich grandfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; $24,000 at the end of eight years. Assuming you could earn 11% annually, which alternative should you choose? If you could earn 12% percent annually, would you still choose the same alternative?

This is a calculation of present values of the three alternatives.
With 11% annual discount rate:
$10,000 now: PV1 = $10,000

$2,000 a year for eight years:
Payment = 2,000, Discount rate = 11%; number ...

$2.19