As a winner of a breakfast cereal competition, you can choose one of the following prizes:

$100,000 now

$4000 a year forever

$10,000 for each year for the next ten years. (First payment is made a year from today)

1) Calculate the present value of each option and rank them. The market interest rate is 5%.

2) The expected inflation rate is 1% per year and therefore real purchasing power of a dollar you get in the future is expected to decrease by 1% a year. Based on this information, calculate the present values and rank them again.