Kristina just won the lottery, and she must choose among three award options. Sh

Question

Kristina just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $64 million, to receive 10 end-of-year payments of $9.7 million, or to receive 30 end-of-year payments of $5.6 million.

If she thinks she can earn 7% percent annually, which should she choose?
-Select-She should accept the 30-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest present valueShe should accept the 10-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest future valueItem 1

If she expects to earn 8% annually, which is the best choice?
-Select-She should accept the lump-sum payment option as it carries the highest present valueShe should accept the 30-year payment option as it carries the highest present valueShe should accept the 10-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest future valueItem 2

If she expects to earn 9% annually, which option would you recommend?
-Select-She should accept the lump-sum payment option as it produces the highest present valueShe should accept the 30-year payment option as it produces the highest present value.She should accept the 10-year payment option as it produces the highest present valueShe should accept the 30-year payment option as it produces the highest future valueItem 3

Explain how interest rates influence her choice.

Explanation / Answer

Present Value of lump sum today = 64 milliion

b. for 10 year payments

FV = 0, N = 10, PMT = 9.7, rate = 7%

use PV function in Excel

Present value = 68.13

c. for 30 year payments

FV = 0, N = 30, PMT = 5.6, rate = 7%

present value = 69.49

so accept the 30 year payments each year

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