After hearing a knock at your front door, you are surprised to see the Prize Pat

Question

After hearing a knock at your front door, you are surprised to see the Prize Patrol from your state’s online lottery agency. Upon opening your door, you learn you have won the lottery of $14.5 million. You discover that you have three options: (1) you can receive $1.45 million per year for the next 10 years, (2) you can have $11.6 million today, or (3) you can have $4.4 million today and receive $1.20 million for each of the next 8 years. Your lawyer tells you that it is reasonable to expect to earn an annual return of 10% on investments. Required: 1. What is the present value of the above options? (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Enter your answers in whole dollar not in millions (i.e., 1,000,000 not 1.0), rounded to nearest whole dollar.)

Option 1

Option 2

Option 3

Option 1

Option 2

Option 3

Explanation / Answer

Annual Return = 10%

Option 1:

$1,450,000 per year for next 10 years:

Present Value = $1,450,000 * PVA of $1 (10%, 10)
Present Value = $1,450,000 * 6.1446
Present Value = $8,909,670

Option 2:

$11,600,000 today:

Present Value = $11,600,000

Option 3:

$4,400,000 today and $1,200,000 per year for next 8 years:

Present Value = $4,400,000 + $1,200,000 * PVA of $1 (10%, 8)
Present Value = $4,400,000 + $1,200,000 * 5.3349
Present Value = $10,801,880

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