Question

show the student's calculator set-up (using the variables from a financial calculator) and answers for each of the 3 parts in the problem. For part c, give an exact percentage answer and not an approximate answer. Clearly identify your answers to each part.

Assume that you just won the state lottery. your prize can be taken either in the form of 40000 at the end of each of the next 25 years (that is 1,000,000 over 25 years) or as a single amount of 500,000 paid immediately.

a. if you expect to be able to earn 5% annually on your investments over the next 25 years, ignorning taxes and other considerations, which aternative should you take? why?  

Answer 1

	PV of $40,000 payments	P×[1-(1÷(1+r)^n)]÷r
	Here,
1	Interest rate per annum	5.00%
2	Number of years	25
3	Number of compoundings per per annum	1
4 = 1÷3	Interest rate per period ( r)	5.00%
5 = 2×3	Number of periods (n)	25
	Payment per period (P)	$                                            40,000
	PV of $40,000 payments	$                                   563,757.78
		40000*[1-(1/(1+5%)^25]/5%

I should not take. PV of payments is more than $500,000.