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 with won $33 milion. You have three options (a) Receive $1.65 million per year for the next 20 years. (0) Have $11.25 million today (c) Have $3 million today and receive $1,350,000 for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to eam 13 percent on investments Required: 1. Calculate the present value of each option. (Future Value of $1. Presentave 51. Future Value Annuity $1. Present Value Anuty of $1.) (Use appropriate factors) from the tables provided. Enter your answers in dollars, not in millions.) Present Value Option A Option C 2. Determine which option you prefer Option A Option Option

Answer 1

Calculating present values

Present value of annuity at 13% for 20 years is 7.025

Present value of Option (a) = $1,650,000 X 7.025 = $11,591,250

Present value of Option (b) = $3,000,000 + ($1,350,000 X 7.025) = $12,483,750

	Present value
Option A	$11,591,250
Option B	$11,250,000
Option C	$12,483,750

Option C should be chosen because it has the highest present value.

Option C