Question

Kristina just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $64 million, to receive 10 end-of-year payments of $9.8 million, or to receive 30 end-of-year payments of $5.6 million.

a. If she thinks she can earn 7% percent annually, which should she choose?

b. If she expects to earn 8% annually, which is the best choice?

c. If she expects to earn 9% annually, which option would you recommend?

d. Explain how interest rates influence her choice.

Answer 1

Ans:- we first find the present value of each of the options and will choose the option that has the highest present value. we will use the PV function of excel to find the present value.

PV function of excel is given by =PV(rate,nper,pmt,fv),where rate is the annual rate, nper is the number of periods, pmt is the periodic payment, fv is the future value.

In the above cases, the option which has the highest present value is chosen,

Ans:-(d) From the above analysis it is clear that if other variables remain the same and the interest rate increases, then the present value will decrease and it will influence the decision of the investor as in this case it has influenced Kristina.

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