Question

You win the lottery and have a choice of receiving annual payments (beginning one year from today) of $50,000 for 25 years - or a lump sum of $875,000. If the discount rate is 2.8%, how much do you gain by making the correct financial choice?
						$50,000.00
						$875,000.00
						2.8%
	25
PV of Pmts:
Gain:
A share of stock has most recently paid am annual dividend of $4.50. The next dividend will be paid one year from today. If you assume the dividend will grow in perpetuity at an annual rate of 2% as it has in the past, and the Required Rate of Return is 8.2%, what is the value of a share of this stock,
						$4.50
						8.2%
						2.0%
Answer:
What would be the value of the stock described in the above question if the annual dividend was not expected to grow. Assume the same Required Rate of Return.
					Answer:
You decide to buy a new car, a new BMW 325, because you think you'll look hip driving it. The car cost $70,000, but you'll only need to finance $62,500. You can finance it at 4.1% APR for 6 years. What will your monthly payments be?
						$70,000.00
						$62,500.00
						4.1%
	6
	12
Answer:

Answer 1

Answer 1:

To compare both the options, we need to calculate the PV value of both.

PV of Option 1:

PV of Annuity = Amount * (1 - (1+R)^(-n))/R

Where, R is the discount rate (2.8%) and n is number of years (25 years). Putting the values in the formula:

= $50,000 * (1 - (1.028^(-25))/0.028

= $890,382

PV of option 2:

The other option is to get $875,000 in lumpsum today.

Clearly, we should choose option 1 as it has greater PV.

The gain we make by choosing option 1 is:

$890,382 - $875,000 = $15,382.