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Future and Present Value News Flash! Several winners were reported for the Mega Millions lottery! In...

Future and Present Value

News Flash! Several winners were reported for the Mega Millions lottery! In California, your client, Caroline Balfort, was one of the winners. She was given three options for receiving her money:

1) $400,000 cash instantly;

2) $133,000 cash immediately along with a six-period annuity of $24,000 starting one-year from today, or

3) a six-period annuity of $30,000 starting one year from today.

The lottery office informed Caroline that the interest rate is 8%. Since Caroline was unsure about how to proceed, she decided to seek advice from you, her attorney. Which option would you recommend for Caroline?

Choose the option with the highest present value.

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Answer #1

Option 1 amount is received by Caroline Balfort instantly Present value of Option 1 is S400,000 as entire winning Present val

1-(1+r Present Value of annuity P Present value of annuity -? P = annuity $30000 rrate of interest per period ie. year = n nu

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