Alex Meir recently won a lottery and has the option of receiving one of the foll

Question

Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $82,000 cash immediately, (2) $30,000 cash immediately and a six-period annuity of $9,000 beginning one year from today, or (3) a six-period annuity of $17,000 beginning one year from today. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1-a. Assuming an interest rate of 7%, determine the PV value for the above options. Option 1 Option 2 Option 3

Explanation / Answer

Present values for the options are as follows:-

Option-1:

As the total prize is receiving immediately, thus present value of the option 1 is $82000/-

Option-2: Present value is as follows:

Thus Total Present value of the option-2 is $72660.

Option-3:

Thus Total Present value of the option-3 is $80580.

Sr. NO. Year Type Prize Amount Received PV Factor @7% Rate of Interest Present Value 1 0 Intial Amount 30000 1 30000 2 1 Annuity 9000 0.93 8370 3 2 Annuity 9000 0.87 7830 4 3 Annuity 9000 0.81 7290 5 4 Annuity 9000 0.76 6840 6 5 Annuity 9000 0.71 6390 7 6 Annuity 9000 0.66 5940 TOTAL 84000 72660

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