$1,000,000 today Problem 1. You recently won $1,000,000 in lottery. You have the
ID: 2484502 • Letter: #
Question
$1,000,000 today Problem 1. You recently won $1,000,000 in lottery. You have the option of receiving or $120,000 at the end of each year for the next 20 years Which option would you chose if you can invest money at: A. 7 Percent B. 11 Percent Use the following format for both options: 7 Percent factor A.7 Pct Year(s) Amount of cash flows Present value of Cash flows Receive the annuity Receive the Lump Sum Net Present Value in Favor of the B.11 Pct Years) Amount of cash flows 11Percent factor Present value of Cash flows Receive the annuityExplanation / Answer
All Amounts in $ (i) If investment is being made at 7 per cent For receiving $ 1,000,000 today, the Present Value will be $ 934,579.44 For receiving an annuity of $ 120,000 at the end of each year for the next 20 years, the Present Value will be $ 1,271,281.71 Hence, the annuity option would be chosen, given that the rate of interest on the investment is 7%. (ii) If investment is being made at 11 per cent For receiving $ 1,000,000 today, the Present Value will be $ 900,900.90 For receiving an annuity of $ 120,000 at the end of each year for the next 20 years, the Present Value will be $ 955,599.37 Here too ,the annuity option would only be chosen.
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