Question

On November 16, 2015 your client won $31.25 million in the lottery. The lottery commission gave them the option of receiving a lump sum or a 25-year annuity paying $1,250,000 each year, with the first payment received on November 16, 2015 and the last payment to be received on November 16, 2039. Your client decided to take the annuity option and has received four payments so far. The annuity payments are made annually by Canada Life Assurance on November 16 of each year. Your client has decided to sell the remaining lottery payments and has retained you to negotiate the best deal available. The deal will be consummated on November 15, 2019. The remaining payments, including the next payment that is due November 16, 2019, will belong to the company that buys the stream of lottery payments from your client. Your job is to negotiate the best deal possible for your client. Your compensation will be based on how much money you are able to get for your client. The compensation will come in the form of your grade. The firms you will be negotiating with are known for being tough negotiators. Dealing with them is known to be so hard a cat can’t even scratch it. Good luck! You’ll need it. Let the negotiations begin!!!! You need to do negotiation, I know discount rate are nor given. but use General sense and answer in the best possible way Anyone please answer

Answer 1

Canada Life Assurance Company has divided the net amount of $ 31.25 million into 25 equal instalments.

My client has received 4 instalments i.e. $5.00 million.

The remaining amount that has to be received from the Assurance company is $ 26.25 million.

Canada Life Assurance has kept

$ 30.00 million for 4 years

$ 28.75 mllion for 3 years

$ 27.55 mllion for 2 years

$ 26.50 mllion for 1 years

It is safe to ask for $ 26.25 million for the remaining cash flow because the present value of the future cash flow will be less than 26.25 million because of the discount factor.

Hence is ok to as for $ 26.25 as sale proceed of the remaning cash flow.