You have won the Mega Lottery of $225 million and will be awarded the prize in t
ID: 2731805 • Letter: Y
Question
You have won the Mega Lottery of $225 million and will be awarded the prize in the form of a 30 year annuity or lump-sum payment (The tax implications are identical for either method of award). Which would you choose? Using present value of a future amount and present value of annuity payments, explain in detail how you made your decision. You have won the Mega Lottery of $225 million and will be awarded the prize in the form of a 30 year annuity or lump-sum payment (The tax implications are identical for either method of award). Which would you choose? Using present value of a future amount and present value of annuity payments, explain in detail how you made your decision.Explanation / Answer
The decision of using present value of future amount is based on the interest factor.Let us assume the interest factor ( discounting rate) @6% per annum. It is assumed that $225M is paid in 30 equal installments.
Amount recieved per year = $225/30
= $7.5M
Method - 1 : Present value of future amount @6% discount factor At 30 years(1/1.1)^30
= $225(01741)
= $39.1447 M
Method -2 : Present value of annuity payments @ 6% per annum For 30 Years
= $7.5M( PVIAF)@6%,30Years
= $7.5M * 13.76
= $103.2 M
Conclusion : It is better to take as per method- 2 because the present value of the cash inflow is more.
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