Question

After hearing a knock at your front door, you are surprised to see the Prize Patrol...

After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large, well-known magazine subscription company. It has arrived with the good news that you are the big winner, having won $33 million. You have three options. (a) Receive $1.65 million per year for the next 20 years. (b) Have $11.25 million today. (c) Have $3 million today and receive $1,350,000 for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to earn 13 percent on investments. Required: 1. Calculate the present value of each option. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Enter your answers in dollars, not in millions.)

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Answer #1
1
Present value
Option A 11590920
Option B 11250000
Option C 12483480
Option C is preferred
Workings:
Option A:
Annuity amount 1650000
X PV factor 7.0248 =(1-(1.13)^-20)/0.13
Present value 11590920
Option C:
Annuity amount 1350000
X PV factor 7.0248
Present value of annuity 9483480
Add: Amount received today 3000000
Present value 12483480
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