1. Benefits received in the future are adjusted to their present value (discounted) because: a. they are uncertain. b. the future may never come, or may come under unforeseen circumstances. c. markets indicate that people need to be compensated for postponing the enjoyment of benefits d. None of the above are true. 2. Your friend (remember from Assignment 5) won several hundred million dollars in the lottery. They told you that they would give you $2,000,000. Finally, you can tell your instructors what you really think of them, quit school, quit your job and never have to work another day in your life. You are a free person. Are you really? Your friend has given you a choice..... You have 2 options in receiving your gift from them. (1.) Take $100,000 per year for the next 20 years. (which you do not accept) or (2.) Take the Cash Option. The cash option consists of taking the Present Value (PV) of 2,000,000 received in 20 years with a discount rate of 6%. You know that cash today is worth more than cash tomorrow because you learned the time value of money in V186. You believe that you can invest and get a better return than your friend's discount rate or that you can enjoy the benefits of winning now instead of later. You decide to take the Cash Option (2) so determine how much your friend will give you with the cash option.... You remember from V186 the discounting formula in the Mikesell textbook. It is PV=FV/(1+r) How much money will you receive by taking the cash option? 3. To what present value would $20,000 received in five years, assuming an annual discount rate of 5%? 4. To what present value would $50,000 received in five years, assuming an annual discount rate of 4%? 5. To what present value would $25,000 received in ten years, assuming an annual discount rate of 15%? 1. Benefits received in the future are adjusted to their present value (discounted) because: a. they are uncertain. b. the future may never come, or may come under unforeseen circumstances. c. markets indicate that people need to be compensated for postponing the enjoyment of benefits d. None of the above are true. 2. Your friend (remember from Assignment 5) won several hundred million dollars in the lottery. They told you that they would give you $2,000,000. Finally, you can tell your instructors what you really think of them, quit school, quit your job and never have to work another day in your life. You are a free person. Are you really? Your friend has given you a choice..... You have 2 options in receiving your gift from them. (1.) Take $100,000 per year for the next 20 years. (which you do not accept) or (2.) Take the Cash Option. The cash option consists of taking the Present Value (PV) of 2,000,000 received in 20 years with a discount rate of 6%. You know that cash today is worth more than cash tomorrow because you learned the time value of money in V186. You believe that you can invest and get a better return than your friend's discount rate or that you can enjoy the benefits of winning now instead of later. You decide to take the Cash Option (2) so determine how much your friend will give you with the cash option.... You remember from V186 the discounting formula in the Mikesell textbook. It is PV=FV/(1+r) How much money will you receive by taking the cash option? 3. To what present value would $20,000 received in five years, assuming an annual discount rate of 5%? 4. To what present value would $50,000 received in five years, assuming an annual discount rate of 4%? 5. To what present value would $25,000 received in ten years, assuming an annual discount rate of 15%
