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    Managerial Finance 476 (II)

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    19. Your grandfather has offered you a choice of one of the three following alternatives:
    $5,000 now; $1,000 a year for eight years; or $12,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative?

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    Solution Preview

    This is a question of present value
    <br>PV=FV/(1+r)^t
    <br>
    <br>1. if discount rate is 11%
    <br>Then the $1000 annuity is computed:
    <br>Payment=1000, T=8, Interest Rate=0.11, compute ...

    $2.19

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