Question

25. You have won the lottery and you have been given the following options. Which one should you choose if the current interest rate is 5% annually?

A. $3,000,000 today

B. $290,000 per year at the end of each of the next 15 years

C. $6,000,000 at the end of 15 years.

D. $350,000 per year at the end of each of the next 10 years

Answer 1

Present value of annuity at 5% for 15 years is 10.380

Present value factor at 5% for 15th year is 0.481

Present value of annuity at 5% for 10 years is 7.722

(Note: All the above mentioned factors are found in Present value table and Present value of annuity table.

25.

Present value:

Option A = $3,000,000

Option B = $290,000 X 10.380 = $3,010,200

Option C = $6,000,000 X 0.481 = $2,886,000

Option D = $350,000 X 7.722 = $2,702,700

Option B has higher present value.

$290,000 per year at the end of each of the next 15 years.

Option B.