Using Financial Accounting Information
Using Financial Accounting Information
10th Edition
ISBN: 9781337276337
Author: Porter, Gary A.
Publisher: Cengage Learning,
Question
Chapter 1, Problem 1.1P
To determine

Introduction: There are lot of investment options available in market like equity, debt, bond, real estate etc. There are various factors which one should think before investing into any option. To ascertain:The decision after lottery winning.

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You just won a lottery—CONGRATULATIONS! Your parents have always told you to plan for the future, so since you already have a well-paying job you decide to invest rather than spend your lottery winnings. The payment schedule from the lottery commission is $100,000 after taxes at the end of year one and 19 more payments of exactly $100,000 after taxes in equal annual end-of-the-year deposits (i.e., 20 deposits of $100,000 each, the first deposit is one year from today) into your account paying 7% compounded annually. How much money will be in your account after the last deposit is made?
Congratulations! You have just won the lottery! However, the lottery bureau has just informed you that you can take your winnings in one of two ways. You can Select to receive a payment of $1,000,000 now or a payment of $1,750,000 in five years. Assume you can earn 5% on funds that you invest today. How much money would you have in five years if you take the immediate $1,000,000 payment and invest it? What does this tell you about the wisdom of selecting the immediate payment versus the future payment? Using the same 5% interest rate, what is the present value of the $1,750,000 that you could receive in five years? What does this calculation tell you about which lottery payout option you should choose? What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.
Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (that is, $1,000,000 over 25 years) or as a single amount of $500,000 paid immediately.i. If you expect to be able to earn 4% annually on your investments over the next 25 years, ignoring taxes and other considerations, which alternative should you take? Why?ii. Would your decision in part (i) change if you could earn 7% rather than 4% on your investments over the next 25 years? Why?

Chapter 1 Solutions

Using Financial Accounting Information

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Similar questions
  • You have just won the Multi-State Lottery. You have the option of receiving a check for $35,000,000 every year at the end of the next 22 years. The lottery commission also allows you the option of receiving a one-time payment of $387,143,417 when you turn in the winning ticket. What is the approximate interest rate that the lottery commission is using to determine the one-time payment? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest percent, X%.) Group of answer choices 7% 6% 8% 5%
    Use the following information for the next two questions: Please answer the two questions. Thank you <3  You finished your studies, passed the CPA board exams, and now an accountant. A real estate company offered to sell you a house with a cash selling price of P14,000,000 under an in-house financing agreement. The amortization will be on a monthly basis over a period of 25 years and the effective interest rate is 12%. You are wondering if you can afford to purchase the house. You estimated your monthly expenditure to be P36,600, which included a risk adjustment allowance. 7. What should be the minimum balance of your monthly take home salary so that you will be able to afford to purchase the house? a 147,451.38 b. 148,051.38 c. 151,048.38 d. 184,051.38 8. How much is the total interest expense on the financing agreement ?  a. 30,235,414 b. 23,335,216 c. 20,235,414 d. 13,265,992
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  • You are the lucky winner of the Ohio Lottery !  Congratulations.   The Lottery tells you that you have won a $20,000,000 prize that will be paid in annual installments of $1,000,000 for 20 years.  If interest rates on alternative investments in the market are 8%, what is the actual value (PV) of your prize?  Round to the nearest 1,000, and show your work.
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    NEEDS TO BE DONE ON EXCEL You have just been notified that you have won the local Bucks for Life lottery. The lottery rules state that you have the option of receiving $25,000 annually for the rest of your life beginning immediately or a single lump sum today. You are not sure which option to take but to begin with you want to be assured that the lottery has enough money set aside to make the annual payments if you choose that option. Your accountant emails you to let you know that “it appears that the lottery has $200,000 in a separate bank account to cover your annual payment.” Assuming an interest rate of 12%, is this enough cash to cover the annual payments of $25,000 over your lifetime?
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