Exercise 3

1. You have been given a choice between two retirement policies as described below.

Policy A: You will receive 10,000 after 10 years.

Policy B: You will receive 8,500 today.

Which policy would you choose? Assume rate of interest is 6 percent

2. Mary will receive $12,000 at the end of each year for the next 7 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent?

3. Mr. Knowitall has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum of $5,000 today, or an annuity due of $1,250 a year for five years. Which option should Mr. Knowitall choose if his opportunity cost is 9 percent?

4. Present value mixed streams, you have two project to invest in, project A and project B.

Year	A	B
1	400	100
2	300	200
3	200	300
4	100	400

1. Find the present value of each stream using a 15% discount rate.

b. which investment you will choose to invest in by taking into consideration the present value of both project.