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As a winner of a breakfast cereal competition, you can choose one of the following prizes: $100,000...

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Finance

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

  • $100,000 now.
  • $100,000 at the end of 5 years.
  • $10,000 a year forever (starting from this year).
  • $11,000 a year forever (starting from next year).
  • $2,000 next year and increasing thereafter by 2% a yearforever
  • $6,000 starting this year, growing at 1% per annum
  • $800,000 at the end of 20 years
  • $5,000 a year for 5 years starting next year
  • $1,000 a year, starting this year for 12 payments
  • $10,000 in year 2 and $50,000 in year 5

If the interest rate is 5%, which is the most valuable prize?Show your working for each.

Answer & Explanation Solved by verified expert
4.2 Ratings (801 Votes)
100000 now Present value 100000 100000 at the end of 5 years Present value Future Value 1 interest raten Here future value 100000 Interest rate 5 N 5 PV 10000010055 PV 7835262 10000 a year forever starting from this year In case of infinite cash flow Present value Cash flow interest rate But for this the cash flow    See Answer
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