After hearing a knock at your front door, you are surprised to see the Prize Pat

Question

After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large, well-known magazine subscription company. It has arrived with the good news that you are the big winner, having won $27 million. You have three options. (a) Receive $1.35 million per year for the next 20 years. (b) Have $9.75 million today. (c) Have $3.75 million today and receive $1,050,000 for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to earn 13 percent on investments. Requirement: 1. Calculate the present value of each option. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Enter your answers in dollars but not in millions.) 2. Determine which option you prefer. Option B Option A Option C

Explanation / Answer

a.Present value of the option Using the formula, PMT*((1-(1+i)^-n)/i) Where PMT=1350000 ; i=13% or 0.13 ;n=20 yrs. 1350000*((1-(1+0.13)^-20)/0.13) 9483415 b.Present value of the option 9750000 c.Present value of the option (3750000)+(1050000*((1-(1+0.13)^-20)/0.13)) 11125989 Options Present Value a 9483415 b 9750000 c 11125989 2. Option c with highest PV of $ 11125989 is preferable.

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