You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $690,000 per ye
ar. Thus, in one year, you receive $1.69 million. In two years you get $2.38 million, and so on. If the appropriate interest rate is 7.9 percent, what is the value of your winnings today? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, and round your answer to 2 decimal places, e.g., 1,234,567.89.)
1 answer:
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Answer:
Difference between A and B =$42398.5
Process B is better as its PW value is smaller than Process A.
Explanation:
In order to use present worth, both Alternatives must have same time period. Since Process B has 4 years means 16 quarters so we make process A to have 16 quarters two with 2% interest rate per quarter.
Note:
We are going to use Compound Interest tables to simplify our work. Formulas can also be used.
For Process A:
Present value of process A=
Present value of process A=
Present value of process A=-$466,932.5
For Process B:
Present value of process B=
Present value of process B=
Present value of process B=-$424,534
Difference between A and B =(-$424,534)-(-$466,932.5)
Difference between A and B =$42398.5
Process B is better as its PW value is smaller than Process A.