Which choice has a greater present value if we assume a required rate of return of 10%? 1: A lump sum cash flow today of $248.69,2: $100 cash flows occurring one,two,and three years from today,or 3: a single cash flow of $331 three years from today.
A)Choice 1
B)Choice 2
C)Choice 3
D)The choices all have equal present values at a discount rate of 10%.

Question

Quizplus · Accepted Answer

To determine the present value (PV) of each choice, we use the formula PV = FV / (1 + r)^n, where FV is the future value, r is the rate of return, and n is the number of periods. For choice 1, the PV is already given as $248.69. For choice 2, the PV of each $100 cash flow is calculated separately for each year and then summed: PV = $100 / (1.1)^1 + $100 / (1.1)^2 + $100 / (1.1)^3 = $90.91 + $82.64 + $75.13 = $248.68. For choice 3, the PV of the $331 cash flow in three years is PV = $331 / (1.1)^3 = $248.69. Thus, all choices have essentially the same present value when rounded, indicating that they are equal in value at a discount rate of 10%.

Which Choice Has a Greater Present Value If We Assume