using financial calculator: 9. You just won a lottery that promises to pay you $
ID: 2740322 • Letter: U
Question
using financial calculator: 9. You just won a lottery that promises to pay you $1,000,000 exactly 10 years from today. Because the $1,000,000 payment is guaranteed by the state you live in, opportunities exist to sell the claim today for an immediate single cash payment. a. What is the least you will sell your claim for if you can earn a 6% rate of return on similar risk investments during the 10-year period? b. What is the least you will sell your claim for if you can earn a 9% rate of return on similar risk investments during the 10-year period? c. What is the least you will sell your claim for if you can earn a 12% rate of return on similar risk investments during the 10-year period?
Explanation / Answer
A./
LEAST SELLING PRICE IF I COULD EARN 6%
PV OF $1000000 AT 6% RATE OF RETURN
= $1000000 * PVIF 6%, 10 PERIODS
= $1000000 * 0.5584
= $558400
B./
LEAST SELLING PRICE IF I COULD EARN 9%
PV OF $1000000 AT 9% RATE OF RETURN
= $1000000 * PVIF 9%, 10 PERIODS
= $1000000 * 0.4224
= $422400
C./
LEAST SELLING PRICE IF I COULD EARN 12%
PV OF $1000000 AT 12% RATE OF RETURN
= $1000000 * PVIF 12%, 10 PERIODS
= $1000000 * 0.3220
= $322000
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