6. Critical analysis Q12 According to a news item, the owner of a lottery ticket

Question

6. Critical analysis Q12 According to a news item, the owner of a lottery ticket paying $3 million over 20 years is offering to sell the ticket for $1.2 million cash now. "Who knows?" the ticket owner explained. "We might not even be here in 20 years, and I do not want to leave it to the dinosaurs." Suppose the ticket pays $150,000 per year at the end of each year for the next 20 years, and the appropriate rate for discounting the future income is thought to be 20% The present value of the ticket is approximately True or False: If the discount rate is in the 20% range, the sale price of $913,046 is reasonable (within 10% of the present value of the ticket) True False

Explanation / Answer

Present value of the lottery ticket is approximately $ 730,440

If the discount rate is in the 20% range, the sale price of $ 913,046 is reasonable : False.

Present value of the lottery ticket = Annual payment x PVIFA 20%, 20 years = $ 150,000 x 4.8696 = $ 730,440

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