IM0096%24LLI3DECISION TIME – LUMP SUM OR PAYMENTSTATWould you rather take a lump sum of $372 million or 30 annual payments of $25million if the current interest rate is 6%?• Use the present value equation to calculate the present value of the $750 million in 30 annualinstallments, given the interest rate of 6% to answer this question.= Ad(? + I) I=}916)12A11)114prt sc144deletehomeendan 6d4.->backspacelockhomeH.enterpause1 shiftpuealtctrlSU IMINR▪ Now that you made your decision, whatwill you do with your money?no.-Explain in detail your first threemoney moves you would conduct withyour new winnings.· For example - Would you spend it? Save it?What are your opportunity costs of yourpurchases? VWhere would you save itstocks/bonds/mutual funds/real estate?Why? Would you give any money tocharities, how about to family andfriends?)- TNLL NOISIOHOYOUR NEW WEALHTH· Make sure to examine the risk and returnrelationship12SUprt scdeletehome114114144pue%24backspaceunu8.homeenterH.4.5.pause↑ shiftpuactrl

The concept of the time value of money states that the current worth of money is more than its value in the future. Present value refers to the current value of a sum of money in the future at a specified interest rate. The present value of annuity refers to the current value of some pre-defined amounts at regular time intervals at a particular interest rate.Part 1: The individual should prefer a lump sum of $372 million rather than an annuity of $25 million as the present value of the lump sum amount is more than the present value of the annuity stream. The present value can be found using the PV Function in excel. Part 2: The lump sum amount should be saved in such a manner that the capital is safe and one uses the appreciation amount or the interest earned on the capital for expenses if any. The opportunity cost of purchases made is the loss of the opportunity to earn interest on the lump sum amount. The individual would rather have an interest on the lump sum amount by parking it in a financial instrument rather than make purchases that would not yield interest. The asset classes when listed in decreasing order of risk: Real estate: High risk: High return Stocks: High risk: High return Mutual funds: Medium risk: Medium return Bonds: Low risk: Low return Bonds are safe and provide a secure return. Mutual funds are diversified pools of funds that are safer than stocks and real estate. Stocks and real estate have very little diversification and are inherently meant for an individual with a good risk appetite. It all depends on the financial goals and risk appetite of an individual. If the individual wants to indulge in any philanthropic activities, charity and donations can be considered.

Answered: - Would you rather take a lump sum of…

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- Would you rather take a lump sum of $372 million or 30 annual payments of $25 million if fhe current interest rate is 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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E15
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