1. ## Investing Fundamentals

John recently won a large sum of money which will be disbursed through two alternative payments:

• Option 1: A one off payment of RM100,000 that will be paid in 10 years.
• Option 2: Three uneven payments of RM10,000, RM30,000 and RM40,000 that will be paid in year 1, 5 and 10, respectively.

Assuming that the current market interest rate is 8 percent, which alternative would John choose?

2. ## Re: Investing Fundamentals

Originally Posted by mastermin346
John recently won a large sum of money which will be disbursed through two alternative payments:

• Option 1: A one off payment of RM100,000 that will be paid in 10 years.
• Option 2: Three uneven payments of RM10,000, RM30,000 and RM40,000 that will be paid in year 1, 5 and 10, respectively.

Assuming that the current market interest rate is 8 percent, which alternative would John choose?
FV - future value
PV - present value
r - interest rate
t - time
FV = PV(1+r)t

the value of option 1 in 10 years is $100,000 to find the value of option 2 we assume he invests all payments at 8% as soon as he receives them FV =$10000(1.08)(10-1) + $30000(1.08)(10-5) +$40000 = $19990.045 +$44079.84 + $40000 =$104069.89

option two has a larger overall future value than option 1.

3. ## Re: Investing Fundamentals

That was cool romsek. Thanks! This is a pretty tough problem, but you got it right. By the way, since we're talking about investments in here, you can check out here if you want to read more financial blogs and articles which may help you create mathematical problems.

4. ## Re: Investing Fundamentals

is that what you are? a spammer? just what we need more of....

5. ## Re: Investing Fundamentals

The other answer did the comparison of net future value of both investments at time period t = 10

That means how much each of the investments is worth at maturity

One may also get the same results by checking how much each of the investment is worth at present time period t=0

The comparison can then be made between the two present values to confirm that indeed the second investment is worth more than the first

PV = 100000 x (1+8%)^-10
PV = 100000 x 0.46319
PV = 46,319.35

Code:
T    CF x PVIF           CF x PVIF         Present Value
1    10000 x (1+8%)^-1   10000 x 0.92593   9,259.26
5    30000 x (1+8%)^-5   30000 x 0.68058   20,417.50
10   40000 x (1+8%)^-10   40000 x 0.46319  18,527.74