Assuming the opportunity interest rate is 8%, what is the present value of the second alternative mentioned above?

A generous university benefactor has agreed to donate a large amount of money for student scholarships. The money can be provided in one lump sum of $12 million in Year 0 (the current year), or in parts, in which $7 million can be provided at the end of Year 1, and another $7 million can be provided at the end of Year 2.

Describe your answer for each item below in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points:

 

Assuming the opportunity interest rate is 8%, what is the present value of the second alternative mentioned above? Which of the two alternatives should be chosen and why?

How would your decision change if the opportunity interest rate is 12%?

 

Provide a description of a scenario where this kind of decision between two types of payment streams applies in the “real-world” business setting

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