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

1. Present value =

a. 1.35 m * PVIFA(13% 20) = 1.35M * 7.025 = $9.48375 M

b. $9.75M

c. $3.75 m + 1.05m * PVIFA(13% 20) = $3.75 m + 1.05m * 7.025 = $11.12625M

2. Option c will be preferred as giving highest present value of $11,126,250.

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