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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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Answer to a question on time value of money.

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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
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