Question 4 (Total 20 marks) Zhang Xu award options. She can elect to receive a l

Question

Question 4 (Total 20 marks) Zhang Xu award options. She can elect to receive a lump sum today of $60 million, to receive IQ end-of-year payments of $9.5 million, or to receive 30 end-of-year payments of $5.5 million. (20 marks) e just won an American Powerball (lottery) and she must choose among three a. Ifshe thinks she can earn 7.5% annually, which should she choose? (5 marks) b. Ifshe expects to earn 8.5% an uually, which is he best choice? (5 marks) C. If she expects to earn 9.5% annually, which option would you recommend? (5 marks) d. Explain how interest rates influence the optimal choice. (5 marks) Answers for Question 4

Explanation / Answer

ANSWER: 4

a) If she thinks she can earn 7.50% annually

                  = $ 5.70 million Per Annum

ANSWER: 5

a)

b)

c)    

      

ANSWER: 4

a) If she thinks she can earn 7.50% annually

Amount = $ 60 million×(7.50/100)                              = $ 4.50 million Per Annum b) If she expects to earn 8.50% annually Amount = $ 60 million×(8.50/100)                   = $ 5.10 million Per Annum c) If she expects to earn 9.50% annually Amount = $ 60 million×(9.50/100)

                  = $ 5.70 million Per Annum

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