Question

Jack and Diane are lottery winners. They hold the ticket to the Grand Prize in the...

Jack and Diane are lottery winners. They hold the ticket to the Grand Prize in the “Set for Life” Prize that makes 20 consecutive annual payments of $50,000 starting immediately. There is one hitch: the eleventh payment (to be received at the end of year 10) is not $50,000 but only $20,000 (that is, this payment is $30,000 LESS than the other 20). Which of the following comes closest to the present value of the prize if interest rates are 6%?

a.

$ 635,849
b.

$ 743,867
c.

$ 591,154
d.

$ 551,529
e.

$ 686,430
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Present value of annuity due concept

Here 11 th payment is 20,000 only.

Here we should calculate 50,000 for 11th payment and cakculate present value of 50,000 for 20 payments. Later present value of 30,000 amount deducted from above calculation.

Present value = 50,000 * PVADF(6% ,20 years) - 30,000 * PVF( 6%,10Years)

Present value = 50,000 * 12.15811649 - 30,000 / (1.06)10

Present value = $ 607,905.824583959 - 16,751.84331

Present value = $ 591,153.98

Present value = $ 591,154

Option c is correct.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
As an employee in the Lottery Commission, your job is to design a new prize. Your...
As an employee in the Lottery Commission, your job is to design a new prize. Your idea is to create two grand prize choices: (1) receiving $50,000 at the end of each year beginning in one year for 20 consecutive years, or (2) receiving $500,000 today followed by a one-time payment at the end of 20 years. Using an interest rate of 6%, which of the following comes closest to the amount prize (2) needs to pay at the end...
A lottery claims its grand prize is ​$20 ​million, payable over 5 years at ​4,000,000 per...
A lottery claims its grand prize is ​$20 ​million, payable over 5 years at ​4,000,000 per year. If the first payment is made​ immediately, what is the grand prize really​ worth? Use an interest rate of 8​%
Congratulations! You have just won the State Lottery. The lottery prize was advertised as an annuitized...
Congratulations! You have just won the State Lottery. The lottery prize was advertised as an annuitized $105 million paid out in 30 equal annual payments beginning immediately. The annual payment is determined by dividing the advertised prize by the number of payments. You now have up to 60 days to determine whether to take the cash prize or the annuity. a. If you were to choose the annuitized prize, how much would you receive each year? b. The cash prize...
The $40 million lottery prize that you have just won actually pays out $2.0 million a...
The $40 million lottery prize that you have just won actually pays out $2.0 million a year for 20 years. The interest rate is 8.0%. a. If the first payment comes after 1 year, what is the present value of your winnings? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Present Value _____________ Million b. What is the present value if the first payment comes immediately? (Do not round intermediate calculations. Enter your...
A woman scratched her way to a $1 million prize on the Ohio Lottery's $5 Million...
A woman scratched her way to a $1 million prize on the Ohio Lottery's $5 Million jackpot instant game ticket. Kimberly L. Matey will get $50,000 for 20 years for a total of $1 million with the first payment paid immediately and 19 more payments paid in the following 19 years. Or she can get a lump sum payment. Suppose the Lottery Authority use 5% as discount rate to calculate the lump sum. What is the lump sum payment?
As the winner of the Friendly Lottery, you are entitled to one of the following prizes:...
As the winner of the Friendly Lottery, you are entitled to one of the following prizes: a) $80,000 per year forever (the first payment starting next year). b) $144,000 per year for the next 10 years starting immediately. c) $320,000 payable every 2 years over 20 years. d) $20,000 starting next year growing by 5.5% forever. Which prize will provide you a higher present value if r = 7%?
A state lottery commission pays the winner of the Million Dollar lottery 20 installments of $50,000/year....
A state lottery commission pays the winner of the Million Dollar lottery 20 installments of $50,000/year. The commission makes the first payment of $50,000 immediately and the other n = 19 payments at the end of each of the next 19 years. Determine how much money the commission should have in the bank initially to guarantee the payments, assuming that the balance on deposit with the bank earns interest at the rate of 4%/year compounded yearly. Hint: Find the present...
1. Lottery payments A major lottery advertises that it pays the winner $10 million. However this...
1. Lottery payments A major lottery advertises that it pays the winner $10 million. However this prize money is paid at the rate of $500,000 each year (with the first payment being immediate) for a total of 20 payments. What is the present value of this prize at 10% interest compounded annually? Report your answer in $millions, rounded to two decimal places. So, for example, if you compute the answer to be 5.7124 million dollars then you should submit an...
1.Write down the equation defining a project’s internal rate of return (IRR). In practice how is...
1.Write down the equation defining a project’s internal rate of return (IRR). In practice how is IRR calculated? Without a computer or financial calculator, IRR can only be computed by trial and error 2.You have the chance to participate in a project that produces the following cash flows: Cash Flows ($)                    C0                C1                C2                                           5,000          4,000          -11,000 The internal rate of return is 14 percent. If the opportunity cost of capital is 10 percent, would you accept the offer? 3.Calculate WACC. Source of capital Cost...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT