Assume the interest rate is 12 %. Which is the most valuable prize
Subject: Business / Finance
Question
(A) As the winner of a breakfast cereal competition, you can choose one of the following prizes:
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(1) $100,000 now,
(2) $180,000 at the end of five years,
(3) $16,000 per year at the beginning of each year for ten years,
(4) $11,400 per year at the beginning of each year forever,
Assume the interest rate is 12 %. Which is the most valuable prize?
(B) You have just graduated from the MBA program here at Seattle University, you plan to work for 10 years then head off to the wilderness of Alaska. You figure you can save $2,000 a year for the first 3 years, since you have to pay off some student loans. You think you will be able to save $8,000 for the next 3 years and $15,000 for the last 4 years. These savings cash flows will start one year from now. In addition, you have just won $4,500 from a graduation trip to Las Vegas. If you put your winnings now, and your future savings when they start, into an account which pays you 6.5% compounded annually, what will your financial "stake" be when you leave for Alaska in ten years time?
