A few days ago, Mr. A has purchased a lottery. Fortunately, he has received a le

Question

A few days ago, Mr. A has purchased a lottery. Fortunately, he has received a letter from the lottery officials that he has won that lottery. Additionally, it has been mentioned in the letter that he has to choose between one of the two given alternatives as his Prize money:

A: Rs. 4,000 every year for next 10 years or;

B: Rs. 54,000 after 10 years.

His opportunity cost is 11%.

Required:

Find the value of each alternative.

Which alternative is acceptable for Mr. A and why?

Explanation / Answer

PV of A = 4000*((1+0.11)^10-1)/(0.11(1+0.11)^10 => = 23556.93 (Rs.) (ANSWER) PV of B = 54000/(1+0.11)^10 => = 19017.96 (Rs.) (ANSWER) Alternative A should be chosen as its PV is higher than that of B. (ANSWER)

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