Jamie is a self-employed consultant. A prospective client has offered her three payment options. Jamie is currently earning 8.5% on her funds. Which one of the following statements is correct
Concerning Jamie's payment options?
Option 1: $10,000 today plus $25,000 at the end of year 2
Option 2: $5,000 today plus $9,000 at the end of year 1 and $22,000 at the end of year 2
Option 3: $36,000 at the end of year 2

Question

Quizplus · Accepted Answer

To determine the best payment option, we need to calculate the present value of each option using Jamie's current rate of return of 8.5%.

Option 1: PV = $10,000/(1+0.085)^1 + $25,000/(1+0.085)^2 = $30,809.95
Option 2: PV = $5,000/(1+0.085)^1 + $9,000/(1+0.085)^1 + $22,000/(1+0.085)^2 = $31,438.53
Option 3: PV = $36,000/(1+0.085)^2 = $30,940.19

Therefore, option 2 has the highest present value and is the best choice for Jamie. Option 1 has the second highest present value, and option 3 has the lowest present value.

Note that the other rate of returns mentioned in the answer choices do not result in the same best choice.

Jamie Is a Self-Employed Consultant