After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large,well-known magazine subscription company. It has arrived with the good news that you are the bigwinner, having won “$20 million.” You discover that you have three options: (1) you can receive$1 million per year for the next 20 years, (2) you can have $8 million today, or (3) you can have $2million today and receive $700,000 for each of the next 20 years. Your financial adviser tells youthat it is reasonable to expect to earn 10 percent on investments. Which option do you prefer? Whatfactors influence your decision?TIP: All three scenarios require you to determine today’s value of the various payment options.These are present value problems.
After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large,
well-known magazine subscription company. It has arrived with the good news that you are the big
winner, having won “$20 million.” You discover that you have three options: (1) you can receive
$1 million per year for the next 20 years, (2) you can have $8 million today, or (3) you can have $2
million today and receive $700,000 for each of the next 20 years. Your financial adviser tells you
that it is reasonable to expect to earn 10 percent on investments. Which option do you prefer? What
factors influence your decision?
TIP: All three scenarios require you to determine today’s value of the various payment options.
These are present value problems.
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