Bill Jones has just won the state lottery and has the following three payout opt
ID: 2463115 • Letter: B
Question
Bill Jones has just won the state lottery and has the following three payout options for after-tax prize money 1. $170,000 per year at the end of each of the next six years 2. $312,000 (lump sum) now 3. $508,000 (lump sum) six years from now The annual discount rate is 9%. Compute the present value of the first option. (Round your answer to the nearest whole dollar.) Present value of an ordinary annuity of $1 10% 0.926 0.9170.909 1.7831.7591.736 2.5772.5312.487 8% 9% 2 3 O A. $762,620 OB, $482,000 O C. $457,251 O D. $850,000Explanation / Answer
Cash Payment Per year 170000 Period in years 6 Rate of Interest 9% Present Value = 170000*(PV factor @ 9%, 6 years) Present Value = 170000*4.486 762620 Year Cash Flows Cumulative Cash Flows 0 -1100000 -1100000 1 400000 -700000 2 390000 -310000 3 380000 70000 4 380000 450000 5 380000 830000 6 380000 1210000 7 380000 1590000 8 380000 1970000 9 380000 2350000 10 380000 2730000 11 380000 3110000 12 450000 3560000 Pay Back Period = 2+(310000/380000) Pay Back Period = 2+0.82 = 2.82 Years Year Cash Flows PV Factor @ 9% Present Value 1 214000 0.917 196238 2 214000 0.842 180188 3 264000 0.772 203808 4 264000 0.708 186912 5 150000 0.650 97500 Total PV of Cash Flows 864646 Year Cash Flows PV Factor @ 15% Present Value 0 -5000000 1 -5000000 1 1256000 0.870 1092720 2 1360000 0.756 1028160 3 2402000 0.658 1580516 4 1158000 0.572 662376 NPV of Cash Flows -636228
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