Question

1.) You won the lottery! (oh, stop it! You didn't win anything). You have a choice between receiving a string of twenty (20) $50,000 payments beginning today or $545,000 today. Assuming you could eam an interest rate of 8%, which choice would you prefer and why (5 points)?

Answer 1

Choice 1

Information provided:

Annual payment= $50,000

Payments= 20

Interest rate= 8%

The present value of annuity due is calculated since the payment is made starting today.

This can be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^nd BGN 2^nd SET on the Texas BA II Plus calculator.

Enter the below in a financial calculator in BGN mode:

PMT= 50,000

N= 20

I/Y= 8

Press the CPT key and PV to compute the present value of annuity due.

The value obtained is 490,907.37.

Choice 2:

Receiving $345,000 today.

I would prefer the first choice of receiving a string of 20 payments of $50,000 since the present value is higher.

In case of any query, kindly comment on the solution.