you have won the lottery, and you have 2 options: Option1: $450,000 cash upfront opetion2: :$200,000...

you have won the lottery, and you have 2 options: Option1: $450,000 cash upfront

opetion2: :$200,000 cash upfront plus payment of $20,000 every quarter for the next 5 years. assume that you can invest at 12% per year, comp quarterly..

How much is the present value of option 2?

Expert Solution

		Annual Rate of interest = 12%
		Quarterly interest rate = 12 % /4 = 3 %

Solution:
	CACLULATION OF THE PRESENT VALUE OF THE OPTION 2

	Quarters	Cash Inflow (Outflow)	PVF of $ 1 @ 3%	Present Value (A XB)
	0	$ 200,000	1.00000	$ 200,000
	1	$ 20,000	0.97087	$ 19,417
	2	$ 20,000	0.94260	$ 18,852
	3	$ 20,000	0.91514	$ 18,303
	4	$ 20,000	0.88849	$ 17,770
	5	$ 20,000	0.86261	$ 17,252
	6	$ 20,000	0.83748	$ 16,750
	7	$ 20,000	0.81309	$ 16,262
	8	$ 20,000	0.78941	$ 15,788
	9	$ 20,000	0.76642	$ 15,328
	10	$ 20,000	0.74409	$ 14,882
	11	$ 20,000	0.72242	$ 14,448
	12	$ 20,000	0.70138	$ 14,028
	13	$ 20,000	0.68095	$ 13,619
	14	$ 20,000	0.66112	$ 13,222
	15	$ 20,000	0.64186	$ 12,837
	16	$ 20,000	0.62317	$ 12,463
	17	$ 20,000	0.60502	$ 12,100
	18	$ 20,000	0.58739	$ 11,748
	19	$ 20,000	0.57029	$ 11,406
	20	$ 20,000	0.55368	$ 11,074

		Total Present Value		$ 497,549

	Answer = Present value of the option 2 = $ 497,549

ekkarill92 answered 3 years ago

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