You are presented with two cash flow options: Option Near,a $5,000 annuity for three years,with the first cash flow one year from today,or Option Far,a $5,000 annuity for six years with the first cash flow ten years from today.Assuming an interest rate of 7.0%,which set of cash flows has a greater present value?
A)Option Near has a greater PV of $13,121.58 vs.Option Far PV of $12,963.41.
B)Option Far has a greater PV of $13,121.58 vs.Option Near PV of $12,963.41.
C)Option Far has a greater PV of $30,000 vs.Option Near PV of $15,000.
D)Option Near and Option Far have the same PV of $12,963.41.

Question

Quizplus · Accepted Answer

To compare the present value of the two options, we need to calculate the present value of each cash flow and add them up. Using the formula for the present value of an annuity, we find that the present value of Option Near is $13,121.58 and the present value of Option Far is $12,963.41. Therefore, Option Near has a greater present value and is the better choice.

You Are Presented with Two Cash Flow Options: Option Near,a