Question

In: Accounting

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?

Solutions

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

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