Corporate finance

QUESTION

2) (Ch5.7) Would you rather receive $1000 a year for 10 years or $800 a year for 15 years ifa.) The interest rate is 5%b.) the interest rate is 20%
Here we are looking at comparing PV of Annuities. Option 1: PMT = 1000 1. PVAn=PMT*PVIFAn,i = PVAn = PMT*[1/i 1/(i*(1 i)^N)] PVA10 = PMT*PVIFA10,5% =1,000*[1/5% 1/(5%*(1 5%)^10)] = 1000*[20 -12.29) = 7710 So PV of annuity of 10 Yrs at 5% is $7710 Option 2 : PMT = 800 1. PVAn=PMT*PVIFAn,i = PVAn = PMT*[1/i 1/(i*(1 i)^N)] PVA15 = PMT*PVIFA15,5% =800*[1/5% 1/(5%*(1 5%)^15)] = 800*[20 -9.62) = 8304 So PV of annuity of 15 Yrs at 5% is $8304 Optio1 : 2. PVAn=PMT*PVIFAn,i = PVAn = PMT*[1/i 1/(i*(1 i)^N)] PVA10 = PMT*PVIFA10,20% =1,000*[1/20% 1/(20%*(1 20%)^10)] = 1000*[5 -0.80) = 4200 So

PV of annuity of 10 Yrs at 20% is $4200 Option2: 2. PVAn=PMT*PVIFAn,i = PVAn = PMT*[1/i 1/(i*(1 i)^N)] PVA15 = PMT*PVIFA15,20% =800*[1/20% 1/(20%*(1 20%)^15)] = 800*[5 -0.324) = 3741 So PV of annuity of 15 Yrs at 20% is $3742 So when Int rate is 5%, I will prefer to get $800 for 15 Yrs as PVA is higher at 8304 When Intrate is 20%, I wil prefer to get $1000 for 10 Yrs as PVA is higher at $4200

ANSWER:

CLICK REQUEST FOR  AN EXPERT SOLUTION