Sally has won the grand prize in a lottery and must choose between the following three options: (hint: find the PV of each option) Receive a lump sum payment of $10,000,000. Receive annual end of the year payments of $2,000,000 for the next 8 years. Receive annual end of the year payments of $1,500,000 for the next 20 years. Which option should Sally choose based on an annual investment rate of 6%?
Sally has won the grand prize in a lottery and must choose between the following three options: (hint: find the PV of each option) Receive a lump sum payment of $10,000,000. Receive annual end of the year payments of $2,000,000 for the next 8 years. Receive annual end of the year payments of $1,500,000 for the next 20 years. Which option should Sally choose based on an annual investment rate of 6%?
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter9: Current Liabilities, Contingencies, And The Time Value Of Money
Section: Chapter Questions
Problem 9.20MCE
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Question
Sally has won the grand prize in a lottery and must choose between the following three options: (hint: find the PV of each option)
- Receive a lump sum payment of $10,000,000.
- Receive annual end of the year payments of $2,000,000 for the next 8 years.
- Receive annual end of the year payments of $1,500,000 for the next 20 years.
Which option should Sally choose based on an annual investment rate of 6%?
Expert Solution
Step 1
Answer -
Option 1 - Received a Lump Sum Payment of $10,000,000.
Option 2 - In Option we will calculate the present value of $2,000,000 at the end of each year for next 8 year at the rate of 6%.
| Payments | Present Value Factor (6%) | Present Value |
| $20,00,000.00 | 0.943 | $18,86,792.45 |
| $20,00,000.00 | 0.890 | $17,79,992.88 |
| $20,00,000.00 | 0.840 | $16,79,238.57 |
| $20,00,000.00 | 0.792 | $15,84,187.33 |
| $20,00,000.00 | 0.747 | $14,94,516.35 |
| $20,00,000.00 | 0.705 | $14,09,921.08 |
| $20,00,000.00 | 0.665 | $13,30,114.23 |
| $20,00,000.00 | 0.627 | $12,54,824.74 |
| Total | $1,24,19,587.62 | |
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