When you graduate from college, your mother plans to give you a gift of $40,000 to start you on your way. However, to determine what you learned in business school, your mother presents you with four options on how to receive the gift. Which of the four options presented by your mother will yield the greatest present value to you?Present Value of $1Periods2%3%4%5%6%10.9800.9710.9620.9520.94320.9610.9430.9250.9070.89030.9420.9150.8890.8640.840Present Value of Annuity of $1Periods2%3%4%5%6%10.9800.9710.9620.9520.94321.9421.9131.8861.8591.83332.8842.8292.7752.7232.673 A lump sum of $40,000 today $20,000 per year for the next 2 years using a 4% discount rate A lump sum of $40,000 after grad school (2 years) assuming a 5% discount rate A lump sum of $40,000 after grad school (2 years) assuming a 4% discount rate

Present value of lum sum = Amount receivable in future * PV $1 (r, n) Present value of annual…

Answered: When you graduate from college, your…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 9FPE

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When you graduate from college, your mother plans to give you a gift of $40,000 to start you on your way. However, to determine what you learned in business school, your mother presents you with four options on how to receive the gift. Which of the four options presented by your mother will yield the greatest present value to you?

Present Value of $1

Periods	2%	3%	4%	5%	6%
1	0.980	0.971	0.962	0.952	0.943
2	0.961	0.943	0.925	0.907	0.890
3	0.942	0.915	0.889	0.864	0.840

Present Value of Annuity of $1

Periods	2%	3%	4%	5%	6%
1	0.980	0.971	0.962	0.952	0.943
2	1.942	1.913	1.886	1.859	1.833
3	2.884	2.829	2.775	2.723	2.673

		A lump sum of $40,000 today
		$20,000 per year for the next 2 years using a 4% discount rate
		A lump sum of $40,000 after grad school (2 years) assuming a 5% discount rate
		A lump sum of $40,000 after grad school (2 years) assuming a 4% discount rate

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