Question

This must be done on excel using formulas. I understand option 1 however for option 2 and 3 I don't know how to get the PV factor percentage in order for me to complete the problem.

E26-23 Using the time value of money Congratulations! You have won a state lottery. The state lottery offers you the follow- ing (after-tax) payout options: Option #1: Option #2: Option #3: $12,000,000 after five years $2,150,000 per year for five years $10,000,000 after three years Assuming you can earn 6% on your funds, which option would you prefer?

Answer 1

Solution:

Fv = PV x (1+r)^n

Option 1:

$12000000 = PV x (1.06)^5

PV = $12000000 / (1.06)^5

PV = $8967098

Option2:

PV = P×[1-(1÷(1+r)^n)] / r

PV = 2150000*[1-(1/(1+0.06)^5)]/0.06

PV = $9056582

Option3:

$10000000 = PV x (1.06)^3

PV = $10000000 / (1.06)^3

PV = $8396193

Therefore, option 2 should be chosen as it gives the highest PV of $9056582.

M155 AB 144 145 146 Option FV $ PV formula PV $ Term in years 147 148 149 150 151 152 Annual Interest rate 0.06 0.06 0.06 12000000 2150000 10000000 E148 / (1+D148) 5 PV(0.06,5,2150000) E149 / (1+D149) 3 8967098 9056582.139 83961931