Question

Option​ #1: $15,000,00 five years from now Option​ #2: $2,200,000 at the end of each year...

Option​ #1:

$15,000,00 five years from now

Option​ #2:

$2,200,000 at the end of each year for the next five years

Option​ #3:

$11,500,000 3 years from now

​Congratulations! You've won a state​ lotto! The state lottery offers you the following​ (after-tax) payout​ options:

Requirement

Assuming that you can earn

8​% on your​ funds, which option would you​ prefer? ​(Round your answers to the nearest whole​ dollar.) Calculate the present value for each payout.

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Homework Answers

Answer #1

Answer

Present value for each payout.

Option 1 - Present value of annuity $1 at 8% rate for 5 year at the begining of year = 1+.925+.857+.793+.735 = 4.31

Present value for option 1 = $1500000 * 4.31 = $6465000

Option 2 - Present value of annuity $1 at 8% rate for 5 year at the end of year = 925+.857+.793+.735+.680 = 3.99

Present value for option 2 = $2200000 * 3.99 = $8778000

Option 3 - Present value of annuity $1 at 8% rate for 3 year at the begining of year = 1+.925+.857 = 2.782

Present value for option 3 = $11500000 * 2.782 = $31993000

I will go for the 3rd option because in 3rd option i m getting $31993000 which is far more than the other option by taking present value factor into the picture.

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