(Q14 IN TYPE B)YOU DECIDE TO SELL YOUR CAR AND SOMEONE HAS OFFERED...

Question

9. (Q14 in Type B)You decide to sell your car and someone has offered you four equal annual payments of $3,100, beginning two years from today. Your alternative is to sell your car today for $9,000 cash. Assuming everything else is equal, should you accept the offer of the four equal payments (the prevailing rate of interest is 10%)? A) Yes; present value is $9,510. B) Yes; present value is $11,372. C)  No; present value is $8,933. D) No; present value is $7,461. Solution C. The PV of the four payments PV= 3,100 / (1+0.1)^2 +3,100 / (1+0.1)^3 +3,100 / (1+0.1)^4 +3,100 / (1+0.1)^5 = $8,933 or use the annuity formula. This is less than the $9,000 you would get today. Therefore you would not accept the offer.

Answer

9. (Q14 in Type B)You decide to sell your car and someone has offered you four equal annual payments of $3,100, beginning two years from today. Your alternative is to sell your car today for $9,000 cash. Assuming everything else is equal, should you accept the offer of the four equal payments (the prevailing rate of interest is 10%)? A) Yes; present value is $9,510. B) Yes; present value is $11,372. C)  No; present value is $8,933. D) No; present value is $7,461. Solution C. The PV of the four payments PV= 3,100 / (1+0.1)^2 +3,100 / (1+0.1)^3 +3,100 / (1+0.1)^4 +3,100 / (1+0.1)^5 = $8,933 or use the annuity formula. This is less than the $9,000 you would get today. Therefore you would not accept the offer.

(Q14 IN TYPE B)YOU DECIDE TO SELL YOUR CAR AND SOMEONE HAS OFFERED...

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