Kristina just won the lottery, and she must choose among three award options. Sh
ID: 2797461 • Letter: K
Question
Kristina just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $63 million, to receive 10 end-of-year payments of $9.8 million, or to receive 30 end-of-year payments of $5.8 million.
If she thinks she can earn 7% percent annually, which should she choose?
-Select-She should accept the 30-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest present valueShe should accept the 10-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest future valueItem 1
If she expects to earn 8% annually, which is the best choice?
-Select-She should accept the lump-sum payment option as it carries the highest present valueShe should accept the 30-year payment option as it carries the highest present valueShe should accept the 10-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest future valueItem 2
If she expects to earn 9% annually, which option would you recommend?
-Select-She should accept the lump-sum payment option as it produces the highest present valueShe should accept the 30-year payment option as it produces the highest present value.She should accept the 10-year payment option as it produces the highest present valueShe should accept the 30-year payment option as it produces the highest future valueItem 3
Explain how interest rates influence her choice.
-Select-The higher the interest rate, the more valuable it is to get money rapidlyThe lower the interest rate, the more valuable it is to get money rapidlyThe higher the discount rate, the higher the more distant cash flows are valuedInterest rates do not influence the optimal choice in any wayInterest rates and the present value of cash flows are positively related
Explanation / Answer
1. In case she can earn 7% annually
She should accept the 30-year payment option as it carries the highest present value
Present value of $9.8 million received for 10 years = 9.8 * 7.024
= $68.3 million
7.024 is the cumulative present value of $1 receivable at the end of each year for 10 years at 7%.
Present value of $5.8 million received for 30 years = 5.8 * 12.4
= $71.9 million
12.4 is the cumulative present value of $1 receivable at the end of each year for 30 years at 7%.
2. In case she can earn 8% annually
She should accept the 10-year payment option as it carries the highest present value
Present value of $9.8 million received for 10 years = 9.8 * 6.71
= $65.7 million
Present value of $5.8 million received for 30 years = 5.8 * 11.25
= $65.2 million
3. In case she can earn 9% annually
She should accept the lump-sum payment option as it produces the highest present value
Present value of $9.8 million received for 10 years = 9.8 * 6.418
= $62.8 million
Present value of $5.8 million received for 30 years = 5.8 * 10.27
= $59.5 million
4. The higher the interest rate, the more valuable it is to get money rapidlyThe lower the interest rate
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.