Answered: How much are the 2 million dollars…

How much are the 2 million dollars received annually over the course of 25 years worth in terms of today's dollars, assuming an annual interest rate of 4%?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 22P

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Concept explainers

Balance of Payments

BOP is categorized into the following three components:

Question

Answer for part d and e only.

1. Suppose you win the lottery and are given the following three options: (1) Receive 30 million dollars today; (2) receive
2 million dollars per year over the next 25 years; or (3) receive 1 million dollars per year indefinitely (being passed on to
your heirs). Which is the best deal, assuming that the annual interest rate is 4%? We answer this by working through the
following sequence of questions.
a. How much are the 2 million dollars received annually over the course of 25 years worth in terms of today's dollars,
assuming an annual interest rate of 4%?
b. Use the answer to part a. to find a general formula for the present value of payments of C dollars received each year
over the next n years, assuming an average annual interest rate r.
c. Find a formula for the present value if annual payments of C dollars continue indefinitely, assuming an average
annual interest rate r.
d. Use the answer to part c. to determine the present value of 1 million dollars paid annually indefinitely.
e. Use your answers to parts a. and d. to determine which of the three options is best.

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