a Myfinancelab-201840x Do Homework dustinjio x C Discount Loan (interest C https

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a Myfinancelab-201840x Do Homework dustinjio x C Discount Loan (interest C https//www.mathel.co ework.aspx2homeworkld 5001365398questionld-1.. dustin jones1 9/14/18 3:07 PM Fi 302 Fall 2018 Hybrid Section Save Homework: Chapter 4 Homework Score: 0 of 1 pt 10 of 10 (5 complete) HW Score: 50%, 5 of 10 pi B4-31 (book/static) Question Help * Lottery Your dreams of becoming rich have just come true. You have won the State of Tranquility's Lottery The State offers you two payment plans for the $5,000,000 advertised jackpot You can take annual payments of $250,000 at the end of the year for the next 20 years or $2,867 480 today a. your nvestment rate over the next 20 years is 8%, which payoff will you choose? b. Il your mestment rate over the next 20 years is 5%, which payoff wil you choose? c. At what investment rate will the annuity stream of $250,000 be the same as the lump sum-payment of $2,867,480? a. If your mestment rate over the next 20 years is 8%, wtat s the present value of the $250,000 annual payments today? S» Rund to the nearest dollar ) Enter your answer in the answer box and then click Check Answer Clear Al Check Answer Do Homework- ispeech M.Microso Exce e 30 min Microsoft Excel B

Explanation / Answer

a)

Present value = Annuity * [ 1 - 1 / ( 1 + r)n] / r

Present value = 250,000 * [ 1 - 1 / ( 1 + 0.08)20] / 0.08

Present value = 250,000 * 9.818147

Present value = $2,454,537

We will choose $2,867,480 today as it has a higher value

2)

Present value = 250,000 * [ 1 - 1 / ( 1 + 0.05)20] / 0.05

Present value = 250,000 * 12.46221

Present value = $3,115,553

We will choose $250,000 every year as it has a higher value

3)

rate = 6%

Keys to use in a financial calculator: PMT 250,000, PV -2867480, N 20, CPT I/Y

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