Question

Value of an annuity versus a single amount Personal Finance Problem Assume that you just won the state lottery Your prize can be taken efther in the form of $34,000 at the end of each of the next 25 years (that is, $850,000 over 25 years) or as a single amount of $545,000 paid immediately atf you exped to be able to t. Would your decision in part a change if you could earn g% rather than 7% on your nvestments over he next 25 years? why? eam 7% arnuary on your investments over the next 25 years ignoring taxes and other considerations, which a ternative should you take? why? c. On a strictly economic basis, at approximately what earnings rate would you be indifferent between the two plans? a. To decide which alternative to take, you need to compare the values of these aternatives. Athough the total nominal dollar amount of the annuity is much larger than the single payment the former is not necessarily a better choice due to the different timing of cash fows A way to make a meaningful comparison of the two afternatives is to compare ther present values If you take the prize as an annuity, the present value of the 25-year ordinary annuity isRound to the nearest cent) if you take the prize as a single amount, the present value of the Aump sum is (Round to the nearest doar Which aternative should be chosen? (Select the best answer below) Lump sum because the present value is greater Annual payments, because the present value is greater O
0 0
Add a comment Improve this question Transcribed image text
Answer #1

a)let us find the present value in both cases and whichever is higher we need to choose it
34000 for next 25 years
use pv formuale in excel:pv(rate,nper,pmt,fv,type)
=pv(7%,25,34000,0)=396221.83
other option is to receive 545000 now
we should take amount 545000 now since this is higher than other option
25 year annuity it is 396221.83
lump sum it is 545000
choose lump sum because the present value is gretaer
b)=pv(9%,25,34000,0)=333967.71
25 year annuity it is 333967.71
lump sum it is 545000
choose lump sum because the present value is gretaer
c)use rate formuale in excel
=rate(nper,pmt,pv,fv,type)
=rate(25,-340000,545000,0,0)
=3.76%

Add a comment
Know the answer?
Add Answer to:
Value of an annuity versus a single amount Personal Finance Problem Assume that you just won...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Value of an annulity versus a single amount Personal Fnance Problm Assume that you just won...

    Value of an annulity versus a single amount Personal Fnance Problm Assume that you just won the stae ottery Your price can be tken olthar in the 900,000 over 25 years) or as a single amount of $411,000 paid inmediately aif you expect to be able to earn 8% anually on your mestne s over the next 2S yenigo ng taxes ar dote, orsiserat ons b would your decisin in part a change you could earn 10% rather than 8%...

  • Value of a retirement annuity Personal Finance Problem An insurance agent is trying to sell you...

    Value of a retirement annuity Personal Finance Problem An insurance agent is trying to sell you an immediate-retirement annuity, which for a single amount paid today will provide you with $11,100 at the end of each year for the next 15 years You currently earn 7% on lovrisk investments comparable to the retrement annuity Ignoring taxes, what is the most you would pay for this annuity? ignoring taxes, the most you would pay for this annuity leu (Round to the...

  • You have just won a lottery.  Your prize is an annuity with a payment of $50,000 at...

    You have just won a lottery.  Your prize is an annuity with a payment of $50,000 at the beginning of each year, starting on 1/1/2020, for 10 years. (a)        What is the present value of your prize as of 1/1/2020? Use an annual interest rate of 4%. You decide to donate your prize to fund an annual scholarship to a university.  The annual scholarship is for $x, given on 5/1 of each year, starting on 5/1/2020, and is supposed to last forever.  This scholarship...

  • Lottery. Your dreams of becoming rich have just come true. You have won the State of...

    Lottery. Your dreams of becoming rich have just come true. You have won the State of Tranquility's Lottery. The State offers you two payment plans for the $4,000,000 advertised jackpot. You can take annual payments of $80,000 at the end of the year for the next 50 years or $978,679 today. a. If your investment rate over the next 50 years is 10%, which payoff will you choose? b. If your investment rate over the next 50 years is 7%,...

  • You and 11 coworkers just won $14 million ($1,166,666.67 each) from the state lottery. Assuming you...

    You and 11 coworkers just won $14 million ($1,166,666.67 each) from the state lottery. Assuming you each receive your share over 17 years and that the state lottery earns a 9 percent return on its funds, what is the present value of your prize before taxes if you request the 'up-front cash' option? (Note: Also assume an ordinary annuity-payments made at the end of each period.) Click on the table icon to view the annuity table ? The present value...

  • You and 11 coworkers just won $18 million ($1,500,000.00 each) from the state lottery. Assuming you...

    You and 11 coworkers just won $18 million ($1,500,000.00 each) from the state lottery. Assuming you each receive your share over 16 years and that the state lottery earns a 9 percent return on its funds, what is the present value of your prize before taxes if you request the up front cash option? (note: assume an ordinary annuity-- payment made at the end of each period) The present value of your prize before taxes if you request the up...

  • Lottery. Your dreams of becoming rich have just come true. You have won the State of...

    Lottery. Your dreams of becoming rich have just come true. You have won the State of Tranquility's Lottery. The state offers you two payment plans for the $3,000,000 advertised jackpot. You can take annual payments of $150,000 at the end of the year for the next 20 years today or $1,277,035 today. ~Please Answer a-b questions below~ Homework: Chapter 4 Homewo rk Score: 0 of 1 pt 15 of 16 (13 complete) P4-31 (similar to) Lottery Your dreams of becoming...

  • You and 11 coworkers just won $14 million ($1,166,666.67 each) from the state lottery. Assuming you...

    You and 11 coworkers just won $14 million ($1,166,666.67 each) from the state lottery. Assuming you each receive your share over 17 years and that the state lottery earns a 8 percent return on its funds, what is the present value of your prize before taxes if you request the up-front cash' option? Click on the table icon to view the annuity table The present value of your prize before taxes if you request the 'up-front cash' option is S...

  • You and 11 coworkers just won ​$19 million ​($1,583,333.33 ​each) from the state lottery. Assuming you...

    You and 11 coworkers just won ​$19 million ​($1,583,333.33 ​each) from the state lottery. Assuming you each receive your share over 17 years and that the state lottery earns a 5 percent return on its​ funds, what is the present value of your prize before taxes if you request the​ 'up-front cash'​ option?  ​(​Note: Also assume an ordinary annuity-payments made at the end of each​ period.) The present value of your prize before taxes if you request the​ 'up-front cash'...

  • You and 11 coworkers just won $18 million ($1,500,000.00 each) from the state lottery. Assuming you...

    You and 11 coworkers just won $18 million ($1,500,000.00 each) from the state lottery. Assuming you each receive your share over 18 years and that the state lottery earns a 3 percent return on its funds, whatis the present value of your prize before taxes r you recu uest the 'up-front cash' option? Click on the table icon to view the annuity table The present value of your prize before taxes if you request the 'up-front cash' option is S...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT