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 $21 million. You have three options. (a) Receive $1.es million per year for the next 20 years. (b) Have $8.25 million today. (c) Have $2.25 million today and receive $75e,eee for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to earn 13 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. Round your final answer to the nearest whole dollar. Enter your answers in dollars, not in millions.) Present Value Option A Option B Option C 2. Determine which option you prefer. Optionc Option A Option B

Answer 1

Prize Patrol Balloons By Sunset Requirement 1 Requirement 1 Option A = 35424 / 432000 = 8.2% Amount desired x PVIFA (20 Yrs, 13%) 1050000 x 7.0248 = $7,376,040 Requirement 2 Option B Amount desired x PVIFA (O Yrs, 13%) 8,250,000 x 1 = $8,250,000 Cashflow = Annual Net Income + Depreciation = 35424 + ( 432000 - 56000) / 8 = 82424 Payback Period = Initial Investment / Cash flow = 432000 / 82424 = 5.24 Years Amount desired x PVIFA (0 Yrs, 13%) $2250000 + $750000 x 7.0248 = $7,518,600 Requirement 3 Net Present Value = - Initial Investment + Cash inflow X (PVIFA 8 Yrs, 8%) + Salvage Value x (PVIF 8 Yrs,8%) Net Present Value = - 432000 + 82424 x (PVIFA 8 Yrs, 8%) + 56000 x (PVIF 8 Yrs,8%) Net Present Value = - 432000 + 82424 x 5.7466 +56000 x 0.5403 Requirement 4 Net Present Value = - Initial Investment +Cash inflow X (PVIFA 8 Yrs, 11%) + Salvage Value x (PVIF 8 Yrs, 11%) Net Present Value = - 432000 + 82424 x (PVIFA 8 Yrs, 11%) + 56000 x (PVIF 8 Yrs, 11%) Net Present Value = - 432000 + 82424 x 5.1461 +56000 x 0.5403 Net Present Value = $16460.55