Marty has just won the National Magazine Sweepstakes. He has two options for rec
ID: 2475694 • Letter: M
Question
Marty has just won the National Magazine Sweepstakes. He has two options for receiving his prize. The first option is to accept a $128,000 cash payment today. The second option is to receive $24,000 at the end of each of the next 13 years and a $29,000 lump sum payment in the 14th year. Marty can invest money at a 7% rate. Click here to view the factor table. (a) Calculate the present value of the two options. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.) Option 1 Option 2 Present value $ $ Which option should Marty choose to receive his winnings? (b) If the money is invested at 10%, calculate the present value of the two options. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.) Option 1 Option 2 Present value $ $ Which option should he choose?
Explanation / Answer
Alternative 1 =Payment received = $ 128,000
Alternative 2 =Payment received = (PVAF@7%,13 * Annual payment ) +(PVF@7%,14 *Lumpsum payment]
= [8.35765 * 24000 ] + [.38782 * 29000]
= 200583.6+ 11246.78
= 211830.38
option 2 is better as payment received under this alternative is higher.
2)If discount rate = 10%
Alternative 1 ,Payment = 128000
Alternative2 ,Payment = (PVAF@10%,13 * Annual payment ) +(PVF@10%,14 *Lumpsum payment]
= (7.10336 * 24000) + ( .26333 * 29000)
= 170480.55 + 7636.61
= 178117.15 [approx 178117 ]
Alternative 2 is better .
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