Identify the payout option that Person A would select.

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Chapter 11, Problem 4TIF

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Identify the payout option that Person A would select.

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Dmitri just won the lottery and must choose between three award options: 1. A lump sum of $20,000,000 received today 2. 15 end-of-year payments of $2,500,000 3. 40 end-of-year payments of $1,800,000 For each option in the table, indicate which values to enter for each variable in your financial calculator. Option 1 Option 2 Option 3 Lump Sum Payment 15 Payments 40 Payments No. of Periods I/YR V = 15 ▼ I/YR V = 40 Annual payment %3D %3D Future Value FV= 0 FV = 0 Present Value $20,000,000 Assume the interest rate is 8.00%, entered as 8 on your financial calculator. Note: Take the absolute value of the present value when answering this question. Using the table you just filled out, along with a financial calculator, yields a present value for option 2 of approximately and a present value for option 3 of approximately (when the interest rate is 8.00%). Based on this, Dmitri should choose option if he seeks to maximize present value.

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Lottery Your dreams of becoming rich have just come true. You have won the State of Tranquility's Lottery. The State offers you two payment plans for the $1.000,000 advertised jackpot. You can take annual payments of $20,000 at the end of the year for the next 50 years or $166,090 today. a. If your investment rate over the next 50 years is 14%, which payoff will you choose? b. If your investment rate over the next 50 years is 10%, which payoff will you choose? c. At what investment rate will the annuity stream of $20.000 be the same as the lump-sum payment of $166.090? a. If your investment rate over the next 50 years is 14%, what is the present value of the $20,000 annual payments today? (Round to the nearest dollar.)