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 $22 million. You have three options. (a) Receive $1.1 million per year for the next 20 years. (b) Have $8.5 million today. (0) Have $2.5 million today and receive $800,000 for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to earn 14 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. Enter your answers in dollars, not in millions.) Present Value Option A Option B Optionc 2. Determine which option you prefer. Option A Option B Optionc

Answer 1

Answer 1.

Option A - 1.1 million received for next 20 years

= PV of $1.1 million received for next 20 years

= $1.1 million × PVAF(14%, 20)

= $1,100,000 × 6.6231

= $7,285,410

Option B $8.5 million in Present = $8,500,000

Option C $2.5 million Today and receive $800,000 for 20 years

PV = $2.5 million + $800, 000 × PVAF(14%, 20)

= $2,500,000 + ($800,000 × 6.6231)

= $2,500,000+ $5,298,480

= $7,798,480

Answer 2 - Option B $8.5 million in Present
Since PV of money is highest in Option(B), it is profitable to have $8.5 million today

Please check the Solution i have used the Present Value of annuity table with 4 digits after decimals. if you have different one, final answer may vary. So if any problem Please comment me. Thanks