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lisov135 [29]
3 years ago
14

A recent Mega Millions estimated jackpot amount is $300 million which is the undiscounted sum of the 26 annuity option payments

with a Cash Option of $207 million. The first payment under the Annuity Option which would occur immediately is $4,515,432 with 29 additional annual payments with each payment being 5% larger than the previous one. Using this information and assuming you demand a 4% annual return, would you prefer the Annuity Option or the Cash Option if you have the winning ticket?
Business
1 answer:
I am Lyosha [343]3 years ago
4 0

Answer:

Itis better to take the case in hand of 207,000,000 millions

Explanation:

We need to calcualte the present value of a geometric annuity-due

\frac{1-(1+g)^{n}\times (1+r)^{-n} }{r - g}

g 0.05

r 0.04

C 4,515,432

n 26

n 26

\frac{1-(1+0.05)^{26}\times (1+0.04)^{-26} }{0.04-0.05}

 127,557,727.45

As is an annuity due, we multiply by (1+r)

127,557,727.45 x (1+0.04) = 132,660,036,548

The present value of the 207,000,000 option is better as the annuity present value is around 130,000,000

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