Question
Your rich aunt offers you the choice of 3 pay-outs today Choice 1: $1,000 paid every year for 5 years, with the first payment to
Your rich aunt offers you the choice of 3 pay-outs today
Choice 1: $1,000 paid every year for 5 years, with the first payment to be received at the end of year 3
Choice 2: $3000 paid today.
Choice 3: $80 paid at the end of each month for 5 years, with the first payment to be received in a month
Question
a. What is the effective annual interest rate would make you indifferent between choice 2 and choice 3
b. If you were to receive the monthly payment of at the beginning of each month for 5 years, what monthly payment would make you indifferent to receiving $3000 today? Use a 10% p.a. interest rate.
c. Calculate the PV of 3 choices and select the best choice among the 3 alternative, use a 10% p.a. interest rate
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