9. You have won the lottery and will receive $20,000 each year for the next 20...

9. You have won the lottery and will receive $20,000 each year for the next 20 years! A financial services company has offered you an upfront payment of $200,000 for the entire income stream. If you estimate the time value of money for you is 5%, would you accept the offer? Explain.

Expert Solution

FIrst calculate the present value of annuity stream

PV of annuity = Annual receipt * (1 - (1 + R)^-N) / R

= 20000 * (1 - (1 + 5%)^-20) / 0.05

= 20000 * 12.46221

= 249244.20

The present value of annuity is greater than the lump sum amount of 200000 provided today. We will choose the offer where the present value as per the given required rate is higher

Hence, we will not accept the upfront payment offer

jeff jeffy answered 2 years ago

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