2. A financial planner has offered you three possible options for receiving cash flows. You must choose the option that has the highest present value.

(1) $1,000 now and another $1,000 at the beginning of each of the 11 subsequent months during the remainder of the year, to be deposited in an account paying a 12 percent nominal annual rate but compounded monthly (to be left on deposit for the year).

(2) $12,750 at the end of the year (assume a 12 percent nominal interest rate with quarterly compounding).

(3) A payment scheme of 4 semi-annual payments made over the next two years. The first payment of $3000 is to be made at the end of the six months. Payments will increase by 20 percent semi-annually. The money is to be deposited in an account paying a 12 percent nominal annual rate, but compounded semi-annually (to be left on deposit for the entire 2-year period).

a. b. c. d.

What is the present value of the first option? What is the present value of the second option? What is the present value of the third option?

Which one will you choose?