1. How much money does Samantha need now to fund her travels? 2. After checking

Question

1. How much money does Samantha need now to fund her travels? 2. After checking with a number of banks, Samantha learns she'll be able to invest her funds only at 6%. How much does she need now to fund her travels? Choosing a lottery payout option (Learning Objective 3) E12-25A Congratulations! You've won a state lotto! The state lottery offers you the following (after- tax) payout options Option #1: $14,500,000 six years from now Option #2: $2.200,000 at the end of each year for the next six years Option #3: $12,500,000 four years from now Requirement Assuming that you can earn 6% on your funds, which option would you prefer? Solve various time value of money scenarios (Learning Objective 3) Suppose you invest a sum of $4,000 in an interest-bearing account at the rate of 10% per year. What will the investment be worth six years from now? How much would you need to invest now to be able to withdraw $6,000 at the end of every year for the next 20 years? Assume a 12% interest rate. E12-26A 1. 2.

Explanation / Answer

Lottery Payout Option 1) Future value $14,500,000 Rate 6.00% Period 6 Present Value =$14,500,000/(1+6%)^6 $10,221,927.84 2) Annual payment $2,200,000 Rate 6.00% Period 6 Present Value =$14,500,000/(1+6%)^6 $10,818,113.52 3) Future value $12,500,000 Rate 6.00% Period 4 Present Value =$12,500,000/(1+6%)^4 $9,901,170.79 Option B is the best.

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