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5 March, 16:42

You have a rich aunt who wants to give you money. She offers you two choices: Choice 1: You receive $100 starting today once a year every year for the rest of eternity. Choice 2: You receive $200 today and then $50 once a year starting next year for all of eternity. Assuming the interest rate

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  1. 5 March, 20:11
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    Choice 1 is more profitable.

    Explanation:

    Giving the following information:

    Choice 1:

    You receive $100 starting today once a year every year for the rest of eternity.

    Choice 2:

    You receive $200 today and then $50 once a year starting next year for all of eternity.

    I will assume an interest rate of 8%

    The first option and second option are a perpetual annuity. To calculate the present value, we need to use the following formula:

    Choice 1:

    PV = Cf/i

    Cf = 100

    i=0.08

    PV = 100/0.08 = $1,250

    Choice 2:

    PV = 50 + 50/0.08 = $825

    Choice 1 is more profitable.
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