Zelda won the jackpot on a penny slot machine in Las Vegas and is given the following three options to receive her jackpot:
Option 1: $100,000 to be received right away, with four additional payments of $100,000 to be received each year for the next four years.
Option 2: $250,000 to be received right away with two additional payments of $100,000 to be received each year for the next two years.
Option 3: $400,000 to be received right away.
Which option should Zelda choose if the interest rate is 8%? Would she choose the same option if the interest rate was 10%? Why?
If the interest rate is 8%:
Option 1: Present value = $100,000 + [$100,000 / (1 + 0.08)] + [$100,000 / (1 + 0.08)2] + [$100,000 / (1 + 0.08)3] + [$100,000 / (1 + 0.08)4] = $431,212.67
Option 2: Present value = $250,000 + [$100,000 / (1 + 0.08)] + [$100,000 / (1 + 0.08)2] = $428,326.47
Option 3: Present value = $400,000.00
Zelda should choose Option 1 since the present value is the highest.
If the interest rate is 10%:
Option 1: Present value = $100,000 + [$100,000 / (1 + 0.10)] + [$100,000 / (1 + 0.10)2] + [$100,000 / (1 + 0.10)3] + [$100,000 / (1 + 0.10)4] = $416, 986.55
Option 2: Present value = $250,000 + [$100,000 / (1 + 0.10)] + [$100,000 / (1 + 0.10)2] = $423,553.72
Option 3: Present value = $400,000.00
Zelda should choose Option 2 since the present value is the highest.
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Suppose the government spends $10 billion subsidizing firms producing electricity with wind turbines because these firms are high cost producers. Will the subsidies lead to economic growth and higher income levels?
A) No, the turbines are an inefficient form of producing electricity and therefore the subsidies will increase the opportunity cost of supplying it. B) Yes, because more people will be employed by the firms producing electricity with wind turbines. C) Uncertain, higher income levels will be achieved if the employment of the firms producing electricity with the wind turbines expands; if not, incomes will fall. D) Yes, because the government will be able to finance the subsidies without reducing private sector output.
In the long run, a higher government deficit does NOT affect equilibrium real Gross Domestic Product (GDP), so that continuous increases in the government deficit will
A. reduce the price level. B. lead to greater tax revenues. C. increase the unemployment rate. D. reduce spending on privately provided goods and services.