Determine the present value of each of the proposals

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Question - Proposal: P1: Pay the family of Allison Boone $300,000 a year for the next 20 years, and $500,000 a year for the remaining 20 years.

P2: Pay the family a lump-sum payment of $5 million today.

P3: Pay the family of Allison Boone a relatively small amount of $50,000 a year for the next 40 years, but also guarantee them a final payment of $75 million at the end of 40 years.

Required -

a) Using a discount rate of 6%, determine the present value of each of the proposals AND recommend which offer is the best and why? Show ALL calculations.

b) Now assume a discount rate of 11% is used. Which of the three alternatives provides the highest present value? Show ALL calculations.

c) Explain why the change in outcomes takes place between part a and part b.

Reference no: EM132913314

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