Sally has won the grand prize in a lottery and must choose between the following three options: (hint: find the PV of each option) Receive a lump sum payment of $10,000,000. Receive annual end of the year payments of $2,000,000 for the next 8 years. Receive annual end of the year payments of $1,500,000 for the next 20 years. Which option should Sally choose based on an annual investment rate of 6%?
Sally has won the grand prize in a lottery and must choose between the following three options: (hint: find the PV of each option) Receive a lump sum payment of $10,000,000. Receive annual end of the year payments of $2,000,000 for the next 8 years. Receive annual end of the year payments of $1,500,000 for the next 20 years. Which option should Sally choose based on an annual investment rate of 6%?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Sally has won the grand prize in a lottery and must choose between the following three options: (hint: find the PV of each option)
- Receive a lump sum payment of $10,000,000.
- Receive annual end of the year payments of $2,000,000 for the next 8 years.
- Receive annual end of the year payments of $1,500,000 for the next 20 years.
Which option should Sally choose based on an annual investment rate of 6%?
Expert Solution
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Step 1
Answer -
Option 1 - Received a Lump Sum Payment of $10,000,000.
Option 2 - In Option we will calculate the present value of $2,000,000 at the end of each year for next 8 year at the rate of 6%.
Payments | Present Value Factor (6%) | Present Value |
$20,00,000.00 | 0.943 | $18,86,792.45 |
$20,00,000.00 | 0.890 | $17,79,992.88 |
$20,00,000.00 | 0.840 | $16,79,238.57 |
$20,00,000.00 | 0.792 | $15,84,187.33 |
$20,00,000.00 | 0.747 | $14,94,516.35 |
$20,00,000.00 | 0.705 | $14,09,921.08 |
$20,00,000.00 | 0.665 | $13,30,114.23 |
$20,00,000.00 | 0.627 | $12,54,824.74 |
Total | $1,24,19,587.62 |
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