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

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Finance

Asa winner of a breakfast cereal competition, you can choose one ofthe following prizes: a) 11,000 a year (forever) and starting NEXTyear b) 12,000 a year (forever) and starting THIS year c) 3,000next year and increasing thereafter by 2% a year forever d) 7,000starting this year, geowing at 1% per annum e) 800,000 at the endof 20 years f) 6,000 a year for 5 years starting next year g) 1,000a year starting this year for 12 payments h) 10,000 in year 2 and50,000 in year 5

*If the interest rate is 5%, which is the most valuable prize?please show all work

Answer & Explanation Solved by verified expert

4.3 Ratings (785 Votes)

Answer In order to determine which one of these options is the most lucrative one we will need to find the present value of each cashflows and compare them When the number of payments is finite over several years Present Value is calculated as CF 1rn When the number of payments is infinite forever it is known as perpetuity PV of See Answer

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