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 $38 million. You have three options. (a) Receive $1.9 million per year for the next 20 years. (b) Have $12.5 million today. (c) Have $2.5 million today and receive $1,600,000 for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to earn 12 percent on investments. Required: 1. 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, not in millions.) Present Value Option A Option B Option C 2. Determine which option you prefer. Option B Option A • Option C inte Dafarangor Pook Pocouron

Answer 1

Answer 1

	Present Value
Option A	$    14,191,860
Option B	$    12,500,000
Option C	$    14,451,040

Answer 2

• Option C

Detailed workings

Option A
Present Value
Years		Cash Inflows(Out flows)	Present Value Factor @ 12%	Present value of Cash flows
20 years	Annual Receipts	$                   1,900,000	7.4694	$         14,191,860
Present Value				$         14,191,860
Option B
Present Value
		Cash Inflows(Out flows)	Present Value Factor @ 12%	Present value of Cash flows
Today	Receipts	$                12,500,000	1.000	$         12,500,000
Net Present Value				$         12,500,000
Option
Present Value
Years		Cash Inflows(Out flows)	Present Value Factor @ 12%	Present value of Cash flows
Today	Receipts	2500000	1	2500000
20 years	Annual Receipts	$                   1,600,000	7.4694	$         11,951,040
Present Value				$         14,451,040