Summary Business Accounting

Question:

Answer each of the following independent questions.

1. Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1)

$64,000 cash immediately, (2) $20,000 cash immediately and a six-period annuity of $8,000 beginning

one year from today, or (3) a six-period annuity of $13,000 beginning one year from today. Assuming an

interest rate of 6%, which option should Alex choose?

2. The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December

31, 2022. Weimer will make annual deposits of $100,000 into a special bank account at the end of each of

10 years beginning December 31, 2013. Assuming that the bank account pays 7% interest compounded

annually, what will be the fund balance after the last payment is made on December 31, 2022?



Answer:



1. Choose the option with the highest present value.



(1) PV = $64,000



(2) PV = $20,000 + 8,000 (4.91732)

Present value of an ordinary annuity of $1: n = 6, i = 6% (from Table 4)



PV = $20,000 + 39,339 = $59,339



(3) PV = $13,000 (4.91732) = $63,925



Alex should choose option (1).