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7 December, 02:28

On Joe Martin's graduation from college, Joe's uncle promised him a gift of $12,000 in cash or $900 every quarter for the next 4 years after graduation. Assume money could be invested at 8% compounded quarterly. a. Calculate the present value of options. (Do not round intermediate calculations. Round your answer to the nearest cent.) b. Which offer is better for Joe? Option 1 Option 2

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  1. 7 December, 06:24
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    Instructions are below.

    Explanation:

    Giving the following information:

    Option 1:

    $12,000 cash now

    Option 2:

    $900 every quarter for 4 years.

    Interest rate = 8% compounded quarterly

    We need to determine the present value of option 2.

    First, we need to calculate the future value of the investment. We will use the following formula:

    FV = {A*[ (1+i) ^n-1]}/i

    A = cash flow = 900

    n = 4*4 = 16

    i = 0.08/4 = 0.02

    FV = {900*[ (1.02^16) - 1]} / 0.02

    FV = $16,775.36

    Now, we determine the present value:

    PV = FV / (1+i) ^n

    PV = 16,775.36 / (1.02^16)

    PV = $12,219.94

    It is more profitable to accept option 2. It provides the highest present value.
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