After hearing a knock at your front door, you are surprised to see the Prize Patrol from your state’s online lottery agency. Upon opening your door, you learn you have won the lottery of $22.1 million. You discover that you have three options: (1) you can receive $2.21 million per year for the next 12 years, (2) you can have $19.5 million today, or (3) you can have $5.4 million today and receive $1.70 million for each of the next 10 years. Your lawyer tells you that it is reasonable to expect to earn an annual return of 10% on investments.

Required:
What is the present value of the above options?

Question

26-02-2020
Business

contestada

After hearing a knock at your front door, you are surprised to see the Prize Patrol from your state’s online lottery agency. Upon opening your door, you learn you have won the lottery of $22.1 million. You discover that you have three options: (1) you can receive $2.21 million per year for the next 12 years, (2) you can have $19.5 million today, or (3) you can have $5.4 million today and receive $1.70 million for each of the next 10 years. Your lawyer tells you that it is reasonable to expect to earn an annual return of 10% on investments.

Required:
What is the present value of the above options?

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sadddamkashmiri801 sadddamkashmiri801 · Answer 1 · 2020-02-26T09:24:21+01:00

Answer:

Option 2 is best option on the basis of present value analysis of all the options available.

Explanation:

Option 1 NPV = ($2.21 Annual Inflow * 6.814 Annuity Factor 12 year @10%) = $15.06m

Option 2 NPV = $19.5m

Option 3 NPV = $5.4m + ($1.7m Annual Inflow * 6.145 Annuity Factor for next 10 years @10%) = $15.85m

From the above options the best option available is option 2 which is worth more in todays prices than other options available.

sohail09753 sohail09753 · Answer 2 · 2021-11-29T10:57:54+01:00

The present value of money is the worth of future money in today's economic value. It is determined by taking into consideration the rate of return over the investment, the period of future worth, and the annual inflow of cash.

The present value of each option is determined to be:

Option 1. $15.06 million

Option 2. $19.50 million

Option 3. $15.85 million

Decision:

Amongst all the options Option 2. is best and is highest in the present value of $19.50 million.

The NPV is computed with the help of the excel formula shown in the image atttached below.

The investor must opt for $19.5 million today.

To know more about present value, refer to the link:

https://brainly.com/question/17322936