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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

EVALUATING LUMP SUMS AND ANNUITIES Crissie just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of-year payments of $9.5 million, or to receive 30 end-of-year payments of $5.5 million.

  1. a. If she thinks she can cam 7% annually, which should she choose?
  2. b. If she expects to cam 8% annually, which is the best choice?
  3. c. If she expects to earn 9% annually, which option would you recommend?
  4. d. Explain how interest rates influence her choice.

a.

Summary Introduction

To determine: The best option if Ms. C can earn 7% annually.

Lump Sum: It is a large amount of money paid on a single occasion instead of paying small amounts from time to time. The amount has been paid for the value of an asset or for other purposes of retirement.

Explanation

Solution:

Receive lump sum amount of $61 million.

In this case, present value of amount received is $61 million.

Receive ten year-end payments of $9.5 million.

Given,

Interest rate is 7%.

Tenure is 10 years.

Annual payment received is $9.5 million.

To compute present value of $9.5 million, apply PV formula on spreadsheet.

Table (1)

In this case, present value of amount received is $66...

b.

Summary Introduction

To determine: The best option, if Ms. C can earn 8% annually.

c.

Summary Introduction

To determine: The best option, if Ms. C can earn 9% annually.

d.

Summary Introduction

To explain: Reason for interest rate affecting choices.

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