You just got a call from your uncle indicating he just won $40,000 in the New Yo

Question

You just got a call from your uncle indicating he just won $40,000 in the New York Take Five. He needs some financial advice. The state offers three different payout plans: a: He can receive $40,000 today, b: He can receive $100 per week for 10 years, c: He can receive monthly payments of $500 for 8 years. What is the better deal for him if he can invest funds nominally at an annual rate of 5.1%? Nominally means you can apply compounding appropriately to the application. Explain.

please solve it on fianace calculater or on excel

Explanation / Answer

We can evaluate these three options only if we know the prevailing interest rate

(a) present value (PV) = 40000

(b) Each year has 52 weeks and 10 years means 520 weeks. If i be the interest rate for one week then

           40000 = 100(1-(1+i)-520 ) /i

400=1-(1+i)^-520/i

i=15%

i per year comes out to be 15%. The current rate should be less than 15% for this investment to be considered.

(c) if i be the interest rate per month then

40000 = 500(1-1+i)-96) / i

80= (1-(1+i)-8) / i

I=12.687

i comes to 12.678 per annum on hit and trial method.

Therefore option a and b would can be considered according to the prevailing interest rate.

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