Question

In: Finance

Despite your better judgment you bought a lottery ticket you won! You now need to decide...

Despite your better judgment you bought a lottery ticket you won! You now need to decide which payout option to take: a) an immediate lump sum of $130,000; b) $1,000 per month to be received at the end of this month and every month thereafter for 40 years in total; or, c) $10,000 to be received one year from now and every year thereafter for 50 years in total.

Assuming an annual discount rate of 9%, which payout option should you take based on a comparison of the present value of each of the 3 payout options (i.e., please note the present value of each alternative and which one you would select)?

Expert Solution

a.Present value of the lump sum is $130,000

b.Information provided:

Monthly payment= $1,000

Time= 40 years*12= 480 months

Interest rate= 9%/12= 0.75% per month

The present value is calculated by entering the below in a financial calculator:

PMT= 1,000

N= 480

I/Y= 0.75

Press the CPT key and PV to compute the present value.

The value obtained is 129,640.90.

Therefore, the present value of the second option is $129,640.90.

c. Information provided:

Monthly payment= $10,000

Time= 50 years

Interest rate= 9%

The present value is calculated by entering the below in a financial calculator:

PMT= 1,000

N= 480

I/Y= 0.75

Press the CPT key and PV to compute the present value.

The value obtained is 109,616.83.

Therefore, the present value of the third option is $109,616.83.

I should choose the lump sum payment of $130,000 since it has the highest present value.

In case of any query, kindly comment on the solution

jeff jeffy answered 1 month ago

Congratulations, you just won the lottery. Now you must decide between two alternatives to receive your...

Congratulations, you just won the lottery. Now you must decide between two alternatives to receive your winnings. The first option is to take the lump sum amount offered today. The second option is to accept a series of equal payments over the next 20 years. Explain how you would set up your calculations that would allow you to select the best alternative .

Prob Set 1 Lottery question 3 3. You just won $250,000 on a lottery ticket. You...

Prob Set 1 Lottery question 3 3. You just won $250,000 on a lottery ticket. You plan to save the money in a retirement account expected to return 8% per year. If you intend to retire in 20 years, how much are these winnings expected to be worth when you retire? a) Suppose you win the lottery but are given the following choice: 1) receive $250,000 today in a lump sum or 2) receive annual payments of $20,000 for...

You just won $900 in the lottery and you decide to invest this money for 10...

You just won $900 in the lottery and you decide to invest this money for 10 years. Three accounts pay as follows: Account A pays 14% interest per year. Account B pays 13.4% interest per year, compounded monthly. Account C pays 13% interest per year, compounded daily. For each account, determine the value of your investment after 10 years. Account A: $ Account B: $ Account C: $ If you are trying to earn the most money possible on your...

1) You buy a lottery ticket to a lottery that costs $10 per ticket. There are...

1) You buy a lottery ticket to a lottery that costs $10 per ticket. There are only 100 tickets available to be sold in this lottery. In this lottery there are one $500 prize, two $100 prizes, and four $25 prizes. Show its probability distribution in the form of a table. What is the standard deviation of your gain or loss? What type of skewness does the probability distribution represent?

After years of playing the lottery, you just won $10,000,000. Now, you have to figure out...

After years of playing the lottery, you just won $10,000,000. Now, you have to figure out how you want it paid to you. You can take a lump sum now before tax, (yes, Uncle Sam will eventually get his part), or you can take annual payments at the end of each year (also before tax). The interest rate is 4% and if you do take the payments, they will be paid over 20 years. 1) What is the lump sum...

You just won $1,000,000 in the lottery. This lottery will pay you $1 a year for...

You just won $1,000,000 in the lottery. This lottery will pay you $1 a year for a million years. Using a martket discount rate of 5% compound annually, what is the current value of this prize? $20 $67 $24.67 $16.66 $12

You have just won a $5,000,000 lottery! You can collect $3,000,000 now or wait 5 years...

You have just won a $5,000,000 lottery! You can collect $3,000,000 now or wait 5 years to collect the full amount. Assume an APR of 5%. Which is the best alternative?

You enter to play the lottery. To your surprise, you've won! You are given the option...

You enter to play the lottery. To your surprise, you've won! You are given the option to accept either a lump-sum payment of $105 million today or annual life-time payments of $3,582,000 beginning today. Assuming current rates of interest are at 3.25% which is the better decision. Be sure to discuss all the aspects and assumptions in making your decision and any calculations you have made to support that decision. How old would you have to live to be indifferent...

You just won your state lottery and will be receiving a check for $1 million. You...

You just won your state lottery and will be receiving a check for $1 million. You have always wanted to start your own food truck business A new food truck with kitchen and other related equipment costs about $100,000. Other fixed costs including salaries, gas for the truck, licensing fees are estimated to be about $50,000 per year. You decided to offer traditional Mediterranean cuisine. Variable costs include food and beverages estimated at $6 per platter (meat, rice, vegetable and...

Suppose you won the lottery but not all of your winnings will come in one year....

Suppose you won the lottery but not all of your winnings will come in one year. Instead, you will get a series of annual payments over the next five years. The table below tells you what your payment will be every year for the next five years. Use the information in the table to make the following computations: The present and future value of your lottery ticket if the interest rate is 8% The present and future value of your...