Question

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today). Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

Answer 1

Using Present value factor,

the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment is 2%.

We have given that

a lump-sum = $10,000 today, or $2,750 in annual payments (first payment today).

This rate takes precedence over the highest four-year present value of $2,750.

To calculate the 4-year present value, use the 2%, 5%, 7%, and 10% unified present value pay tables.

Present Value Factor

at 2% - 3.8077 value - 2750* 3.8077 = 10471.2

at 5% - 3.5460 value - 2750* 3.5460 = 9751.5

If interest rates rise, the amount will be reduced.

So 2% is the highest rate .

To learn more about Present Value Factor refer:

https://brainly.com/question/12498377

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