Question

You've won the lottery! You will be paid $1 million per year starting now with 10 additional annual $1 mm payments.

If r=5%, what is the PV of your winnings?

The lottery commission offers you an option to take $1,000,000 now and $500,000 per year for 36 additional annual payments. Should you accept it?

Does your answer change if you are 70 years old with no heirs?

How is your answer affected if you can sell the “bonds”, i.e. the contracted payments?

Answer #1

1] | PV of winnings = 1000000*1.05*(1.05^11-1)/(0.05*1.05^11) = | $ 8,721,735 |

2] | PV of alternative payments = 1000000+500000*(1.05^36-1)/(0.05*1.05^36) = | $ 9,273,426 |

Yes, the alternative offer of the commission should be accepted | ||

as it has higher PV at the required return of 5%. | ||

3] | Yes. My answer would change as I would take the 1st option | |

because I will be only 81 years by the end of the payment | ||

period, and is likely to survive that age. | ||

The alternative will end only at my age of 106 years, which I am | ||

most likely not to reach. | ||

4] | If the contracted payments can be sold, then the alternative | |

offer of the commission of 36 years, will be preferred, as it can | ||

be sold for a higher value. |

You just won a $1 million lottery today, and the rule of the
lottery is to pay you $40,000 per year for the next 10 years,
followed by $60,000 per year for the following 10 years. The first
payment starts one year from now. You estimated the appropriate
interest rate is 10% pa, what is the winnings worth today?

You have just won the lottery and will receive $500,000 in one
year. You will receive payments for 22 years, which will increase 4
percent per year. The appropriate discount rate is 10 percent.
Required:
What is the present value of your winnings?
Multiple Choice
$5,907,208
$5,670,920
$20,290,274
$20,290,274

You have just won the lottery and will receive $600,000 in one
year. You will receive payments for 16 years, and the payments will
increase 5 percent per year. If the appropriate discount rate is 12
percent, what is the present value of your winnings?

You have just won the lottery and will receive $650,000 in one
year. You will receive payments for 15 years, and the payments will
increase 4 percent per year. If the appropriate discount rate is 11
percent, what is the present value of your winnings?

Q1/ you just won the lottery. Now you must decide between two
alternatives to receive your winnings. The first option is to take
the lump sum amount offered today. The second option is to accept a
series of equal payments over the next 20 years. Explain
how you would set up your calculations that would allow you to
select the best alternative.?

You just won $1 million dollars in the lottery! They offer you
two options for your winnings: a lump sum payment right now, or
$100,000 a year over the next 10 years. Current 10-year interest
rates are at 5%, and the current tax on lottery winnings is
40%.
What is the amount you will receive today with the lump sum
option?
Which option would you select? How would you present your
argument for your decision in a debate?
Sorry, you...

You have just won the lottery and will receive $620,000 in one
year. You will receive payments for 15 years, which will increase 3
percent per year. The appropriate discount rate is 12 percent.
Required:
What is the present value of your winnings?

You have just won the lottery and will receive $640,000 in one
year. You will receive payments for 23 years, which will increase 4
percent per year. The appropriate discount rate is 10 percent.
Required: What is the present value of your winnings?

Congratulations! You have just won the lottery ,which will pay
you an annuity of $50,000 per year for the rest of your life. If
you are 21 today and will die with certainty at 90, this means you
will receive 70 payments of $50,000. Let’s say someone offers to
give you $1,000,000 today in exchange for this annuity. If the
interest rate is 5%, should you take this deal? Why or why not?

Show steps
Congratulations! You have just won $20 million lottery. You will
be paid $1 million a
year
for the next 20 years – and you receive your first check today.
Ignoring, for the
moment,
the taxes you’ll have to pay, what are your winnings really worth
today?
Assume an 7% discount rate.

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