Question

Value of an annuity versus a single amount Assume that you just
won the state lottery.

Your prize can be taken either in the form of $40,000 at the end of
each of the

next 25 years (that is, $1,000,000 over 25 years) or as a single
amount of $500,000

paid immediately.

**PLEASE SHOW ALL WORK OR EXCEL FUNCTIONS**

a. If you expect to be able to earn 5% annually on your investments
over the next

25 years, ignoring taxes and other considerations, which
alternative should you

take? Why?

b. Would your decision in part a change if you could earn 7% rather
than 5% on

your investments over the next 25 years? Why?

c. On a strictly economic basis, at approximately what earnings
rate would you be

indifferent between the two plans?

Answer #2

a)

Rate= | 5% | ||

Time(n) | 25 | ||

Amount received annually | 40000 | ||

PV of the anuity using excel | 563757.78 | PV(5%,25,40000) |

Prize of 40,000 should be taken per month rather than the lump
sum of 500,000 because PV of prize money is 563757.78 which is
higher than the lump sum amount of 500,000

b)

Rate= | 7% | ||

Time(n) | 25 | ||

Amount received annually | 40000 | ||

PV of the anuity using excel | 466143.33 | PV(7%,25,40000) |

Yes the decision would chnage for rate = 7% beacuse PV =
466143.33 which is less than the lump sum of 500,000

c)

Rate using Rate function of excel | 6.24% | Rate(25,40000,-500000) |

Rate at which he would be indifferent = 6.24%

answered by: anonymous

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