Question

Present Value Computation Kerry Bales won the state lottery and was given four choices for receiving her winnings. 1. Receive $250,000 right now. 2. Receive $270,000 in 1 year. 3. Receive $45,000 at the end of each year for eight years. 4. Receive $22,500 at the end of each year for 40 years. Assuming Kerry can earn interest of 8% compounded annually, (a) calculate each option and (b) determine which option Kerry should choose? Use Excel or a financial calculator for computation. Round your answer to nearest dollar. (a) 1. $ (a) 2. $ (a) 3. $ (a) 4. $ (b)

Answer 1

Ans:

Option 1). Receive $250,000 right now.

Present Value = $250,000

Opton 2) Receive $270,000 in One Year.

Present Value = $270,000*(1/(1+8%))

= $270,000*0.92592592

= $250,000

Option 3) Receive $45000 at the end of each year for 8 years.

Present Value = $45000*5.7466389

=$ 258599

Option 4) Receive $22,500 at the end of each year for 40 years.

Present Value = $22500 * 11.9246133

= $268304

Option	Present Value
1	$250,000
2	$250,000
3	$ 258599
4	$268304

The Highest Present Value in Option 4 ($268304)

Option 4 should kelly choose.