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You are planning to buy a lottery ticket for the $5,000,000 jackpot. If you have (Option...

You are planning to buy a lottery ticket for the $5,000,000 jackpot. If you have (Option A). the cash option of receiving $5,000,000 today or you can opt to choose (Option B). the 20 payments of $400,000. Your investment account earns 6% interest compounded annually.

What is the present value of OPTION B? (Please use two decimals).

Solutions

Expert Solution

Present value = Annuity * [1 - 1 / (1 + rate)^time] / rate

Present value = 400,000 * [1 - 1 / (1 + 0.06)^20] / 0.06

Present value = 400,000 * [1 - 0.3118] / 0.06

Present value = 400,000 * 11.46992

Present value = $4,587,968.49

jeff jeffy answered 2 years ago
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