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) $64,000 cash immediately, (2) $20,000 cash immediately and a six-period annuity of $8,000 beginning one year from today, or (3) a six-period annuity of $13,000 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.)

  

Assuming an interest rate of 6%, determine the PV value for the above options.

Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $64,000 cash immediately, (2) $20,000 cash immediately and a six-period annuity of $8,000 beginning one year from today, or (3) a six-period annuity of $13,000 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.)

Which option should Alex choose? Option (1) Option (2) Option (3) The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2022. Weimer will make annual deposits of $100.000 into a special bank account at the end of each of 10 years beginning December 31 2013. Assuming that the bank account pays 7% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2022?

Explanation / Answer

Please note: the appropriate factor tables have not been attached in the question

1)

Present value of option 1 = 64,000

Present value of option 2 = immediate cash payment + annuity * [ 1 - 1 / ( 1 + R)n]] / R

Present value of option 2 = 20,000 + 8,000 * [ 1 - 1 / ( 1 + 0.06)6] / 0.06

Present value of option 2 = 20,000 + 8,000 * 4.917324

Present value of option 2 = $59,338.59

Present value of option 3 = 13,000 * [ 1 - 1 / ( 1 + 0.06)6] / 0.06

Present value of option 3 = 13,000 * 4.917324

Present value of option 3 = $63,925.22

2)

Alex should choose option 1 as it has the highest present value.

3)

Future value = annuity * [( 1 + R)n - 1 ] / r

Future value = 100,000 * [ ( 1 + 0.07)10 - 1 ] / 0.07

Future value = 100,000 * 13.816448

Future value = $1,381,644.796

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.