To determine which present is the best option, we need to calculate the present value of each option using a discount rate of 10%.
A) A single payment of $75,000 received in 5 years:
To calculate the present value, we use the formula:
PV = \frac{FV}{(1 + r)^n}
Where PV is the present value, FV is the future value, r is the discount rate, and n is the number of years.
Plugging in the values, we have:
PV_A = \frac{75000}{(1 + 0.10)^5} = \$49707.65
B) $8,000 per year for 10 years, starting two years from now:
To calculate the present value of an annuity, we use the formula:
PV = C \times \left(\frac{1 - (1 + r)^{-n}}{r}\right)
Where PV is the present value, C is the annual cash flow, r is the discount rate, and n is the number of years.
Using the values given, we have:
PV_B = 8000 \times \left(\frac{1 - (1 + 0.10)^{-10}}{0.10}\right) = \$60247.36
C) One payment of $47,500 received today:
Since this is the present value, the value remains the same.
D) A growing perpetuity that pays $2000 each year starting one year from now, growing at a rate of 1.5% per year:
The present value of a growing perpetuity can be calculated using the formula:
PV = \frac{C}{{r - g}}
Where PV is the present value, C is the annual cash flow, r is the discount rate, and g is the growth rate.
Plugging in the values, we have:
PV_D = \frac{2000}{{0.10 - 0.015}} = \$22222.22
Therefore, the present value of each option is:
A) \$49,707.65
B) \$60,247.36
C) \$47,500.00
D) \$22,222.22
Since option B has the highest present value, I would choose option B, which is receiving $8,000 per year for 10 years, starting two years from now.