A group of college students won a record Powerball jackpot of $423 million. The

Question

A group of college students won a record Powerball jackpot of $423 million. The group had 2 choices:

     A) Receive 30 beginning of the year payments of 14.1 million each

     B) Receive a lump sum payment today of $211.5 million immediately

Draw the time lines for the two choices and show work

Find the FV (at the end of year 30) of the two choices assuming interest rate is 11%? Which choice should the group select?

Find the PV of the two choices assuming interest rate is 11%. Which choice should the group select?

Find the FV (at the end of year 30) for the two choices assuming interest is 4%. Which choice should the group select?

Find the PV of the two choices assuming interest rate is 4%. Which choice should the group select?

Explanation / Answer

PV = FV/(1+r)^n

PV - Present value

FV - Future value

r - Interest rate

n - no. of periods

Time line for option a.

Time line of opiton2:

Year 0 = $211.5 million

a.

FV :

Future value of option 1= $3114.88 million

FV of option 2 = 211.5*(1+0.11)^30 = $4841.72

Select option 2

b.

PV @ 11%

PV of option 1= $136.07 million

PV of option 2 = 211.5 million

Select option 2

C.

FV @ 4%

FV of option 1 = $822.43 million

FV of option 2 = $685.98 million

Select option 1.

d.

PV of option 1 = $253.57 million

PV of option 2 = $211.5 million

Select option 1

Year(n) Cashflow (A) 0 14.10 1 14.10 2 14.10 3 14.10 4 14.10 5 14.10 6 14.10 7 14.10 8 14.10 9 14.10 10 14.10 11 14.10 12 14.10 13 14.10 14 14.10 15 14.10 16 14.10 17 14.10 18 14.10 19 14.10 20 14.10 21 14.10 22 14.10 23 14.10 24 14.10 25 14.10 26 14.10 27 14.10 28 14.10 29 14.10

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