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MGT201 GDB

Mr. Ali has won the lottery and must choose between receiving Rs. 5,000 annually for 20 years (Option A) or Rs. 90,000 in 12 years (Option B). Using a discount rate of 8%, the present value of Option A is calculated to be Rs. 490,900 while Option B is Rs. 35,740. Option A has a higher present value and is therefore the more acceptable choice for Mr. Ali.

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Syed Abdul Mussaver Shah
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86 views

MGT201 GDB

Mr. Ali has won the lottery and must choose between receiving Rs. 5,000 annually for 20 years (Option A) or Rs. 90,000 in 12 years (Option B). Using a discount rate of 8%, the present value of Option A is calculated to be Rs. 490,900 while Option B is Rs. 35,740. Option A has a higher present value and is therefore the more acceptable choice for Mr. Ali.

Uploaded by

Syed Abdul Mussaver Shah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Topic: Time Value of Money

Learning Objective:
By attempting this GDB, students will be able to calculate the Time Value of money and to
understand its importance in financing and investing decisions.
Graded Discussion Question:
Mr. Ali has just been informed by the lottery officials that he has won a lottery. It has been
mentioned in the letter that he has to choose between one of the two given alternatives as
his Prize money:
A: Rs. 5,000 every year for next 20 years or;
B: Rs. 90,000 after 12 years
If appropriate discount rate is 8%, then
1. Find the value of each alternative.
2. Based on the value calculated in first part, suggest which alternative is
acceptable for Mr. Ali and why?

A part is constant cash flows its mean this is annuity,so try to use annuity formula for
calculating pv of constant cash flows,
which is  Pv=5000[1-1/(1+.08)^20)/.08]
             pv=490,90 Rs.
option B pv is
Pv=Fv/(1+i)^n
Pv=90,000/(1.08)^12
Pv=35,740 Rs.
2).  Option A is acceptable for Mr.Ali because the pv of 1st alternative is more than
second.So it is more feasible for him.
now no more confusions.Stay happy all and Allah paak bless u all. 

A part is constant cash flows its mean this is annuity,so try to use annuity formula
for calculating pv of constant cash flows,
which is  Pv=5000[1-1/(1+.08)^20)/.08]
             pv=490,90 Rs.
option B pv is
Pv=Fv/(1+i)^n
Pv=90,000/(1.08)^12
Pv=35,740 Rs.
2).  Option A is acceptable for Mr.Ali because the pv of 1st alternative is more than
second.So it is more feasible for him.
 

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