Question

You have just won the Kryshak lottery and you are given the following options to receive your winnings:

1. A lifetime annuity of $480,000 per year, with the first payment occurring one year from today. Your life expectancy is 40 years. (You will receive 40 payments)

2. A payment of $461,050 per year for 30 years (30 payments) with the first payment made immediately.

3. $7,945,000 five years from now. If your opportunity cost is 9%, which should you pick

please respond in business calculator form

Answer 1

The question is solved by calculating the present value of the three options.

1.Information provided:

Annuity= $480,000

Time= 40 years

Interest rate= 9%

Enter the below in a financial calculator to compute the present value:

PMT= 480,000

I/Y= 9

N= 40

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

The value obtained is 5,163,532.89.

Therefore, the present value is $5,163,532.89.

2.Information provided:

Annuity= $461,050

Time= 30 years

Interest rate= 9%

The question is concerning finding the present value of an annuity due. Annuity due refers to annuity that occurs at the beginning of a period.

This can also be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2ndBGN 2ndSET on the Texas BA II Plus calculator.

Enter the below in a financial calculator in BGN mode to compute the present value:

PMT= 461,050

I/Y= 9

N= 30

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

The value obtained is 5,162,968.33.

Therefore, the present value is $5,162,968.33.

3.Information provided:

Future value=$7,945,000

Time= 5 years

Interest rate= 9%

Enter the below in a financial calculator to compute the present value:

FV= 7,945,000

N= 5

I/Y= 9

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

The value obtained is 5,163,704.86.

Therefore, the present value is $5,163,704.86.

Therefore, I would pick the third option since it has the highest present value.