Question: Assume that your grandmother wants to give you a generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive:
Option A: Receive a one-time gift of $10,000 today.
Option B: Receive a $1600 gift each year for the next 10 years. The first $1600 would be received 1 year from today.
Option C: Receive a one-time gift of $20,000 10 years from today.
Compute the Present Value of each of these options if you expect the interest rate to be 4% annually for the next 10 years. Which of these options does financial theory suggest you should choose?
Option A would be worth $__________ today.
Option B would be worth $__________ today.
Option C would be worth $__________ today.
Financial theory supports choosing Option _______
Compute the Present Value of each of these options if you expect the interest rate to be 7% annually for the next 10 years. Which of these options does financial theory suggest you should choose?
Option A would be worth $__________ today.
Option B would be worth $__________ today.
Option C would be worth $__________ today.
Financial theory supports choosing Option _______
Compute the Present Value of each of these options if you expect to be able to earn 10% annually for the next 10 years. Which of these options does financial theory suggest you should choose?
Option A would be worth $__________ today.
Option B would be worth $__________ today.
Option C would be worth $__________ today.
Financial theory supports choosing Option _______