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

In this case we will have to calculate the present value pf all the 3 payout options.

Option a: He can receive $40,000 today. So the present value = $40,000

option b: $100 per week for 10 years. Taking number of weeks in a year as 52.1 we get a total of 52.1*10 = 521 payments of $100 each. present value = amount/(1+discount rate)^n

now r = 5.1% per annum or per 52 weeks. r for 1 week = 0.098077%

Present value of the payment made in 1st week = 100/(1+0.000981)^1. PV of payment made in 2nd week = 100/(1+0.000981)^2 and pv of payment made in the 521st week = 100/(1+0.000981)^521

Calculating in excel:

(Kindly note that i could not show the full table for the period week 1 to week 521 as the table was getting very long for the availabe space constraint, so i have shown figures for period 1-50 and then from week 500 onwards)

Option c: Total monthly payments = 12*8 = 96. amount = $500. monthly r = 5.1/12 = 0.425% 1+r = 1.00425

As PV is the highest in option "b" ($40,776.24) this option should be selected.

Week Amount 1+r PV 1 100 1.000981 99.90 2 100 99.80 3 100 99.71 4 100 99.61 5 100 99.51 6 100 99.41 7 100 99.32 8 100 99.22 9 100 99.12 10 100 99.02 11 100 98.93 12 100 98.83 13 100 98.73 14 100 98.64 15 100 98.54 16 100 98.44 17 100 98.35 18 100 98.25 19 100 98.15 20 100 98.06 21 100 97.96 22 100 97.87 23 100 97.77 24 100 97.67 25 100 97.58 26 100 97.48 27 100 97.39 28 100 97.29 29 100 97.20 30 100 97.10 31 100 97.01 32 100 96.91 33 100 96.82 34 100 96.72 35 100 96.63 36 100 96.53 37 100 96.44 38 100 96.34 39 100 96.25 40 100 96.15 41 100 96.06 42 100 95.97 43 100 95.87 44 100 95.78 45 100 95.68 46 100 95.59 47 100 95.50 48 100 95.40 49 100 95.31 50 100 95.22 500 100 61.25 501 100 61.19 502 100 61.13 503 100 61.07 504 100 61.01 505 100 60.95 506 100 60.89 507 100 60.83 508 100 60.77 509 100 60.71 510 100 60.65 511 100 60.59 512 100 60.53 513 100 60.47 514 100 60.41 515 100 60.35 516 100 60.29 517 100 60.23 518 100 60.18 519 100 60.12 520 100 60.06 521 100 60.00 TOTAL 40776.24

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.