Solving the Net present Value

Question

A popular movie actress has been offered a two-year contract. She can either accept $2,350,000 now or accept monthly amounts of $100000 payable at the end of each month. If money can be invested at 3.5% compounded monthly, compute the net present value of each option and decide which is the better option for the actress and by how much?

Answer 1

Hi Mo,

 

For the first option, you can use the formula:

 

A=P(1+i/n)^nt

 

Where,

A = final amount

P = initial deposit

i = interest (in decimals)

n = number of compounds per year

t = years

 

The second option is calculated by using

 

A=M(((1+i/n)^nt) -1)(n/i)

 

Where,

A = final amount
M = deposits per period
i = interest (in decimals)
n = number of periods per year
t = years

 

Hope this helps