Which is worth more- $12,000 today or $1,500/ year for next ten years?
Please explain. Thank you.

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Request for Question Clarification by omnivorous-ga on 14 Oct 2003 15:26 PDT

Uzzz --

This is a classic discounted cash flow question in finance.  However,
you need to provide an inflation rate in order to make the
calculation.

Best regards,

Omnivorous-GA

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Clarification of Question by uzzz-ga on 15 Oct 2003 05:58 PDT

Please use 3% inflation rate. Thank you for taking a look at this question.

Uzzz

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Request for Question Clarification by mvguy-ga on 15 Oct 2003 06:29 PDT

Is the $1,500 added at the beginning of each year or at the end?

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Clarification of Question by uzzz-ga on 15 Oct 2003 11:19 PDT

research_help-ga has provided a very good comment.

To reply to the clarification request the $1,500 is added at the
beginning of each year.

As a non finance person I really would like to have this "classic
discounted cash flow question" explained showing the formula. Thank
you.

Uzzz

If you assume you receive $1,500 at the end of each year, the net
present value of the stream is $12,795.30.  If you assume you receive
$1,500 at the beginning of each year, the net present value of the
stream is $13,179.16.  Either way, the stream is better than the lump
sum (based on the 3% rate.)

The time that you have taken to post your comment is very much appreciated.

I calculated my answers using an Excel formula, but if you want to
know the math behind it:

$1,500 at the beginning of year 1 is $1,500 now so it is worth $1,500
today.

$1,500 at the beginning of year 2 is $1,500 discounted by your 3%
assmumed rate, so it is worth $1,500/(1.03) = $1,456.31 today.

$1,500 at the beginning of year 3 is $1,500 discounted by 3%
compounded 2 years, so it is worth $1,500/(1.03)^2 = $1,413.89 today.

$1,500 at the beginning of year 4 is $1,500 discounted by 3%
compounded 3 years, so it is worth $1,500/(1.03)^3 = $1,372.71 today.

...and so on and and so on until you get to the final payment and add
all 10 payments together

5 STARS   Just what I was looking for! Wish I could pay you for your
assistance... and tip too!

Very best regards

Uzzz