Question

Question 5 (1 point) You win the lottery! You can either take the money now or wait 30 years and receive it then. If you get it now, then the best investment that you found is a 30 year CD that will earn 5%/year. The lottery offers you $5,000,000 if take the winnings today or $15,000,000 if you wait 30 years. Assuming their are no other risks, taxes, or opportunity costs (i.e. missing out on the fun of having $5 million now is not a deciding factor), what should you do? Take the $5,000,000 now and invest it in the CD Take the $15,000,000 in 30 years Question 6 (1 point) Time Value of Money concepts are based on the idea that a dollar today is worth less than a dollar in the future. O O True False

Answer 1

5) The correct option is :- Take the $ 5,000,000 now and invest it in the CD

To decide if you have to take the lottery money now or wait for 30 years and receive $ 15,000,000, we have to calculate the future value of receiving $ 5,000,000 now and invest that money in a CD that pays 5% per year for 30 years.

Future value = Present value x ( 1 + interest rate ) ⁿ

Future value of $ 5,000,000 invested in a CD at a rate of 5% per years is calculated as follows

Future value = $ 5,000,000 x ( 1+0.05)³⁰

Future value = $ 21,609,711.88

Thus to take $ 5,000,000 and invest in CD has a higher future worth in 30 years than to wait for 30 years to receive $ 15,000,000.

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6) The correct answer is false

Explanation:- Time value of money is based on the idea that a dollar today is worth more than a dollar in the future. Time value of money is the difference in value between a dollar received today and a dollar received in the future. Dollar received today can be invested and can generate a return hence receiving a dollar now is more worth than receiving some years later.