When you graduate from college,your mother plans to give you a gift of $50,000 to start you on your way.However,to determine what you learned in business school,your mother presents you with four options on how to receive the gift.Which of the four options presented by your mother will yield the greatest present value to you?

Question

Quizplus · Accepted Answer

Option A is the best choice as it provides a lump sum of $50,000 today which has the highest present value. The other options involve receiving the gift in installments or after a period of time with a discount rate, which reduces the present value of the gift. Option B involves receiving $25,000 per year for two years which would have a present value of around $48,548 at a 3% discount rate. Option C involves receiving the gift after grad school with a discount rate of 5%, which would have a present value of around $45,284. Option D, although it has a lower discount rate of 3%, still yields a lower present value of around $47,164. Therefore, option A is the most valuable choice.

When You Graduate from College,your Mother Plans to Give You