Question

After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large, well-known magazine subscription company. It has arrived with the good news that you are the big winner, having won $27 million. You have three options. (a)Receive $1.35 million per year for the next 20 years. (b)Have $9.75 million today. (c)Have $3.75 million today and receive $1,050,000 for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to earn 13 percent on investments.

Answer 1

Answer:

option A - $9.48 miilion

Option B - $9.75 million

Option C - 11.13 miilion

option c

Explanation:

Calculate the present value of each option. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Enter your answers in dollars but not in millions.)

 2. Determine which option you prefer.

Option A

Option B

Option C

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Option 1

Cash flow each year from year 1 to 20 = $1.35 million

I = 13%

Present value = 9.48 miilion

option 2

PV = $9.75 million

Option 3

Cash flow in year 0  =  $3.75 million

Cash flow each year from year 1 to 20 = $1.05 million

I = 13%

Present value = 11.13 million

option 3 has the highest present value and should be chosen  

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

9.48 miilion

11.13 miilion