w Insert Format Tools Table Window Help {D K) (5 w time value of m av sign Layou
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w Insert Format Tools Table Window Help {D K) (5 w time value of m av sign Layout References Mailings Review View Snow une aetans or your caicuianons. Type your answers ana supporting caicuiaions on tne sheet, or complete in pencil and scan before attaching this in Blackboard on or before the due date. Time Value of Money Calculations A. Mike won the lottery and has the following options for his winnings: $100,000 at the beginning of the year (today) A lump sum payment of S160,000 at the end of the ninth year $13,000 at the end of each year for 8 years 1. 2. 3. He can invest his winnings at an annual rate of return of4%, which option is best? Show your calculations for each option. Hint- use present value techniques where applicable to make the options comparable. Show your work and answers bclow ronts tHer parents will oive her 535.000 at theExplanation / Answer
Option 1 :Receive $ 100,000 today
Present value of cash inflow=
$ 100,000
Option 2: Receive a lump sum payment of $ 160,000 at the end of the ninth year
Cash inflow at the end of ninth year=
PVIF (4%,9)
Present value of cash inflow=
$ 160,000
0.7026
$ 112,416
Option 3: Receive $13,000 at the end of each year for 8 years
Cash inflow at the end of each year=
PVIFA (4%,8)
Present value of cash inflow=
$ 13,000
6.7327
$ 87,551
While considering the 3 options as above Option 2, that is receiving a lump sum payment of $ 160,000 at the end of the ninth year gives the highest cash inflow and it should be chosen.
Option 1 :Receive $ 100,000 today
Present value of cash inflow=
$ 100,000
Option 2: Receive a lump sum payment of $ 160,000 at the end of the ninth year
Cash inflow at the end of ninth year=
PVIF (4%,9)
Present value of cash inflow=
$ 160,000
0.7026
$ 112,416
Option 3: Receive $13,000 at the end of each year for 8 years
Cash inflow at the end of each year=
PVIFA (4%,8)
Present value of cash inflow=
$ 13,000
6.7327
$ 87,551
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