Finance

posted by .

Your Uncle has two alternative inheritence for you.
A. You receive 5000 today and 1000 per year for the next 8 years.
or
B. 5000 today and nothing each year for the next 7 years and at end of 8th year receive 12,000

Which is best and why.

Current interest rate is 10% annually on both scenerios.

Compare what you would have at the end of eight years if you invested the payments and got 10% interest. That means comparing
A. 5000*(1.1)^8 + 1000*(1.1)^7 + 1000*(1.1)^6 + 1000*(1.1)^5 + .. 1000*(1.1)+ 1000.
and
B. 5000*(1.1)^8 + 12,000.
Both options get 8 years of compounded interest on \$5000, so let's just compare the rest.
Option A gets an additional 1948.72 + 1771.56 + 1610.51 + 1464.10 + 1331.00 + 1210.00 + 1100.00 + 1000.00. That assumes a \$1000 payment at the end of the eighth year. The total is 11,435.89 extra after 8 years, compared to \$12,000 for option B. Go with B. Many people would choose A anyway, for the benefit of more current income.

Thanks so much. I reviewed what you listed and it actually made sense. That was very helpful.

Similar Questions

1. Finance

The Mutual Assurance and Life Company is offering an insurance policy under either of the following two terms: a. Make a series of 12 payments of 1,200 at the beginning of each of the next 12 years (the first payment being made today) …
2. Finance

Problem: Calculate the value of your retirement if you contribute \$5000 today, \$1000 at the end of each year, at 8% interest for 30 years. Repeat the same question with 14%.
3. Personal Finance Concepts

After a protracted legal case, Joe won a settlement that will pay him \$11,000 each year at the end of the year for the next ten years. If the ,market interest rates ar currently 5%, exactly how much should the court invest today, assuming …
4. Finance

You are now 30 years old. You plan to retire in 30 years, and expect to live for 30 years after retirement, that is, until you are 90. You want a fixed retirement income that has the same purchasing power at the time you retire as …
5. Personal Finance

After a protracted legal case, Joe won a settlement that will pay him \$11,000 each year at the end of the year for the next ten years. If the market interest rates are currently 5%, exactly how much should the court invest today, assuming …
6. Finance

After a protracted legl case, Joe won a settlement that will pay him \$11,000 each year at the end of the year for the next ten years. If the market interest rates are currently 5%, exactly how much should the court invest today, assuming …
7. finance

You have won a contest that will pay you \$10,000 a year at the end of each of the next 5 years. Based on a discount rate of 8% per year, what is the annuity worth to you today
8. Finance

BH Holding Inc. is considering undertaking a capital project, costing \$8 million today. in addition, the project will be installed over the next 2 years, costing \$1.0 million at the end of the first year and \$0.5 million at the end …
9. Personal Finance

Assume that you are 23 years old and that you place \$3,000 year-end deposits each year into a stock index fund that earns an average of 9.5% per year for the next 17 years. how much money will be in the account at the end of 17 years.
10. Finance

EMAR expects to receive \$2,000 per year for 10 years and \$3,500 per year for the next 10 years. What is the present value of this 20-year cash flow?

More Similar Questions