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 $27 million. You have three options. (a) Receive $1.35 million per year for the next 20 years. (b) Have $9.75 million today. I Have $3.75 million today and receive $1,050,000 for each of the next 20 (c) years. Your financial adviser tells you that it is reaschable 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

Answer 1

Answer
Option A	$ 9.48348 million
Option B	(b) $9.75 million
Option C	$11.12604 million

Working

(a) PV of $1.35 million received for next 20 years

$1.35 million × PVAF(13%, 20)

$1.35 million × 7.0248

$ 9.48348 million

(b) $9.75 million

(c) $ 3.75 million and $10,50,000 for 20 years

PV = $3.75 million + $1050000×PVAF(13%, 20)

$3.75 million + ($1.05 million×7.0248)

$ 3.75 million + $7.37604 million

$11.12604 million

Since PV of money is highest in Option(C), it is profitable to have $11.12604 million today

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