Value of an annuity versus a single amount Personal Finance Problem Assume that you just won the state lottery. Your prize can be taken either in the form of $37,000 at the end of each of the next 20 years (that is, $740,000 over 20 years) or as a single amount of $508,000 paid immediately. a. If you expect to earn 7% annually on your investment over the next 20 years, ignoring taxes and other considerations, which alternative should you take? Why? b. Would your decision in part a change if you could earn 9% rather than 7% on your investments over the next 20 years? Why? c. At approximately what interest rate would you be indifferent between the two options?
Value of an annuity versus a single amount Personal Finance Problem Assume that you just won the state lottery. Your prize can be taken either in the form of $37,000 at the end of each of the next 20 years (that is, $740,000 over 20 years) or as a single amount of $508,000 paid immediately. a. If you expect to earn 7% annually on your investment over the next 20 years, ignoring taxes and other considerations, which alternative should you take? Why? b. Would your decision in part a change if you could earn 9% rather than 7% on your investments over the next 20 years? Why? c. At approximately what interest rate would you be indifferent between the two options?
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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Transcribed Image Text:Value of an annuity versus a single amount Personal Finance Problem
Assume that you just won the state lottery. Your prize can be taken either in the form of $37,000 at the
end of each of the next 20 years (that is, $740,000 over 20 years) or as a single amount of $508,000
paid immediately.
a. If you expect to earn 7% annually on your investment over the next 20 years, ignoring taxes and other
considerations, which alternative should you take? Why?
b. Would your decision in part a change if you could earn 9% rather than 7% on your investments over
the next 20 years? Why?
c. At approximately what interest rate would you be indifferent between the two options?
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