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 a large, well-known magazine subscription company. It has arrived with the good news that you are the big winner, having won $28 million. You have three options (a) Receive 31.4 million per year for the next 20 years. b) Have $10 million today (a) Have $4 million today and racaive $1, 100,000 for cach of the next 20 years. Your financial adviser tells you that it is reasonable to expect to earn 14 percent on investments. Required: 1. Calculate the present value of each option. (Future Value of $1, Present Value of $1. Future Value Annuity of S1. Present Value Annuity of $1) (Use appropriate factor(s) from the tables provided. Enter your answers in dollars, not in millions.) Present Value Option A Option B Option C 2. Determine wwhich option you prefer O Option A Option C OptionB

Explanation / Answer

Answer 1.

Option A:

Receive $1,400,000 per year for next 20 years

Present Value = $1,400,000 * PVA of $1 (14%, 20)
Present Value = $1,400,000 * 6.62313
Present Value = $9,272,382

Option B:

Have $10,000,000 today

Present Value = $10,000,000

Option C:

Have $4,000,000 today and receive $1,100,000 for next 20 years

Present Value = $4,000,000 + $1,100,000 * PVA of $1 (14%, 20)
Present Value = $4,000,000 + $7,285,443
Present Value = $11,285,443

Answer 2.

Option C will be preferred as its NPV is highest.

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