Using present value techniques..?

1) You have just won the state lottery and have two choices for collecting your winnings. You can collect $66,000 (Option 1) today or receive $10,700 (Option 2) per year for the next five years. A financial analyst has told you that you can earn 11 percent on your investments. What is the present value?

2) Smith Company has purchased a new office building. The company has agreed to pay the developer $59,000 annually for 11 years. Using present value techniques, determine the value that should be recorded for the building when it is purchased. Assume a 9 percent annual interest rate.

Any help would be appreciated, thank you!

2 Answers

  • Don G
    Lv 7
    9 years ago
    Favorite Answer

    1) You want to compare the PV of an Annuity of 10,700 for 5 yrs, earning 11% APR. That's 39,546, vs 66,000 received today. Use the TVM tables to get the factor for the PV of an Annuity, N5, R 11%, which is 3.6959 x the annuity of 10,700 to get its PV of 39,546.

    2) What is the PV of an Ordinary Annuity (First payment 12 mos from now) of 59,000, N 11, R 9%. That's 401,506. However, if the first payment is made on day 1, an Annuity Due, PV is 437,642.

  • gertie
    Lv 4
    4 years ago

    I was asking myself about this as well

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