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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

EVALUATING LUMP SUMS AND ANNUITIES Kristina just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $62 million, to receive 10 end-of-year payments of $95 million, or to receive 30 end-of-year payments of $5.6 million.

  1. a. If she thinks she can earn 7% annually, which should she choose?
  2. b. If she expects to earn 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 Person K can earn 7% annually.

Lump Sum:

The lump sum 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

Receive lump sum amount of $62 million.

In this case, present value of amount received is $62 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 Person K can earn 8% annually.

Lump Sum:

The lump sum 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.

c.

Summary Introduction

To determine: The best option if Person K can earn 9% annually.

Lump Sum:

The lump sum 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.

d.

Summary Introduction

To explain: Reason for interest rate affecting choices.

Lump Sum:

The lump sum 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.

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