After hearing a knock at your front door, you are surprised to see the Prize Patrol...

After hearing a knock at your front door, you are surprised to see the Prize Patrol from your state’s online lottery agency. Upon opening your door, you learn you have won the lottery of $14.5 million. You discover that you have three options: (1) you can receive $1.45 million per year for the next 10 years, (2) you can have $11.6 million today, or (3) you can have $4.4 million today and receive $1.20 million for each of the next 8 years. Your lawyer tells you that it is reasonable to expect to earn an annual return of 10% on investments. Required: 1. What is the present value of the above options? (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Enter your answers in whole dollar not in millions (i.e., 1,000,000 not 1.0), rounded to nearest whole dollar.)

2.

The Jenkins Corporation has purchased an executive jet. The company has agreed to pay $201,200 per year for the next 10 years and an additional $2,012,000 at the end of the 10th year. The seller of the jet is charging 6% annual interest. Determine the liability that would be recorded by Jenkins. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your answer to nearest whole dollar.)

Present Value

Expert Solution

Solution 1:

Present value of the above options is as calculated below:

Option 1	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Total
Cash Received	$0	1.45	1.45	1.45	1.45	1.45	1.45	1.45	1.45	1.45	1.45	$15
Discount rate 10% , Life 10 years
Present Value factor	1	0.909	0.826	0.751	0.683	0.621	0.564	0.513	0.467	0.424	0.386
Present Value of Net Cash flow	0.00	1.32	1.20	1.09	0.99	0.90	0.82	0.74	0.68	0.61	0.56	$8.91

Option 2	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Total
Cash Received	$11.6											$11.6
Discount rate 10% , Life 10 years
Present Value factor	1	0.909	0.826	0.751	0.683	0.621	0.564	0.513	0.467	0.424	0.386
Present Value of Net Cash flow	11.60	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	$11.60

Option 3	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Total
Cash Received	$4.4	1.2	1.2	1.2	1.2	1.2	1.2	1.2	1.2			$14.0
Discount rate 10% , Life 10 years
Present Value factor	1	0.909	0.826	0.751	0.683	0.621	0.564	0.513	0.467	0.424	0.386
Present Value of Net Cash flow	4.40	1.09	0.99	0.90	0.82	0.75	0.68	0.62	0.56	0.00	0.00	$10.80

ekkarill92 answered 2 years ago

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