Answer to Question #140283 in Finance for tom

Question #140283
Jamie is thinking of retiring. His retirement plan will pay him either $1,500,000
immediately on retirement or $2,100,000 five years after the date of his
retirement.
(a) Which option should Jamie choose if the interest rate is 0% per year?
(b) Which option should Jamie choose if the interest rate is 10% per year?
1
Expert's answer
2020-10-27T08:13:02-0400


Present value=


With interest rate of 0%, PV= will be 1,500,000 and 2,100,000 respectively.


For interest rate if 10% then PV=


In 5years then: PV=


Therefore when the interests rate is 0% then it is better to take 2100000 since it has higher present value as compared to first option of 1,500,000.


For the interest rate of 10% then it is better to take 1,500,000 immediately as it has higher Present value than the second option.



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