Bill Jones has just won the state lottery and has the following three payout opt

Question

Bill Jones has just won the state lottery and has the following three payout options for after-tax prize money: dollar 150,000 per year at the end of each of the next six years dollar 304,000 (lump sum) now dollar 500,000 (lump sum) six years from now The annual discount rate is 9 percentage. Compute the present value of the first option (Round your answer to the nearer whole dollar.) Present value of an ordinary annuity of dollar 1: Present value of dollar 1: dollar 750,000 dollar 672,900 dollar 454,000 dollar 450,050

Explanation / Answer

Answer : B) $ 672,900

Working Notes for the above answer is as under

We will calculate the prasent value of he option

Now Prasent Value for each oprtion is as under

Prasent Vlaue of the option A higher so Bill Jones should select the Alternative 1 with valye $672,900

Alternative 1 Year Cash Flow PV factor @
9% Prasent
Value 1 150,000 0.9174 137614.68 2 150,000 0.8417 126252.00 3 150,000 0.7722 115827.52 4 150,000 0.7084 106263.78 5 150,000 0.6499 97489.71 6 150,000 0.5963 89440.10 672900.00

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