Exercise 9-6 Chuck has just won the Flyball Lottery. He has two options for rece

Question

Exercise 9-6 Chuck has just won the Flyball Lottery. He has two options for receiving his prize. The first option is to accept a $131,000 cash payment today. The second option is to receive $17,300 at the end of each of the next 12 years and a $32,100 lump sum payment in the 13th year. Chuck can invest money at a 9% 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 O decimal place, e.g. 58,971.) Option 1 Option 2 Present value Which option should Chuck choose to receive his winnings? (b) If Chuck could invest money at 12%, 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 o decimal place, e.g. 58,971.) Option 1 Option 2 Present value s Which option should he choose? Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Answer a.

Option 1:

Present Value = $131,000

Option 2:

Annual Payment for next 12 years = $17,300
lump Sum payment at the end of 13 year = $32,100

Present Value = $17,300 * PVIFA(9%, 12) + $32,100 * PVIF(9%, 13)
Present Value = $17,300 * 7.1607 + $32,100 * 0.3262
Present Value = $134,351

So, Chuck should choose Option 2

Answer b.

Option 1:

Present Value = $131,000

Option 2:

Annual Payment for next 12 years = $17,300
lump Sum payment at the end of 13 year = $32,100

Present Value = $17,300 * PVIFA(12%, 12) + $32,100 * PVIF(12%, 13)
Present Value = $17,300 * 6.1944 + $32,100 * 0.2292
Present Value = $114,520

So, Chuck should choose Option 1

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