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    Time Value of Money

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    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

    PVIF= Present Value Interest Factor
    PVIFA= Present Value Interest Factor for an Annuity

    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
    PVIF( n, r%)= =1/(1+r%)^n

    Case 1
    Rate= 11%
    Alternative 1
    5000 now

    Alternative 2:
    1000 a year for 8 years
    We calculate the present value of this

    Rate=r= 11%
    No of years=n= 8
    Amount per year= $1,000.00
    PVIFA= (8 periods, 11.% rate)= 5.146123
    Present ...

    Solution Summary

    Answer to a question on time value of money.

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