A generous university benefactor has agreed to donate a large amount of money for student scholarships. The money can be provided in one lump sum of $12 million in Year 0 (the current year), or in parts, in which $7 million can be provided at the end of Year 1, and another $7 million can be provided at the end of Year 2.
Explain your answer for each item below in complete sentences, whenever it is required. Show all of your computations and processes for the given points:
a. Supposing the opportunity interest rate is 8%, what is the present value of the second alternative described above? Which of the two alternatives must be selected and why?
b. How would your decision change if the opportunity interest rate is 12%?
c. Give a explanation of a scenario where this kind of decision between two kinds of payment streams applies in the "real-world" business setting.