The winner of a lottery is given a choice of $1,000,000 cash today or $2,000,000 paid out as follows: $100,000 cash per year for 20 years with the first payment today and 19 subsequent annual payments thereafter. The inflation rate is expected to be constant at 4%/yr over the award period and the winner’s TVOM (real interest rate) is 3.5%/yr. Solve, a. Which choice is better for the winner? Neglect the effect of taxes, life span, and uncertainty. b. At what value of inflation are the two choices economically equivalent? c. What would you do if you do NOT neglect the effect of life span and uncertainty?
The winner of a lottery is given a choice of $1,000,000 cash today or $2,000,000 paid out as follows: $100,000 cash per year for 20 years with the first payment today and 19 subsequent annual payments thereafter. The inflation rate is expected to be constant at 4%/yr over the award period and the winner’s TVOM (real interest rate) is 3.5%/yr. Solve, a. Which choice is better for the winner? Neglect the effect of taxes, life span, and uncertainty. b. At what value of inflation are the two choices economically equivalent? c. What would you do if you do NOT neglect the effect of life span and uncertainty?
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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The winner of a lottery is given a choice of $1,000,000 cash today or $2,000,000 paid out as follows: $100,000 cash per year for 20 years with the first payment today and 19 subsequent annual payments thereafter. The inflation rate is expected to be constant at 4%/yr over the award period and the winner’s TVOM (real interest rate) is 3.5%/yr. Solve, a. Which choice is better for the winner? Neglect the effect of taxes, life span, and uncertainty. b. At what value of inflation are the two choices economically equivalent? c. What would you do if you do NOT neglect the effect of life span and uncertainty?
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