Question

1. You have seriously taken to heart the principle of time value of money, so much so that you have decided to take up gambling and buy a cheap round-trip bus ticket to Wendover, Nevada where you think you can quickly win your retirement dollars. Conveniently, there are three casinos on the corner of the bus depot to assist you in your get-rich-quick scheme. As an added convenience, there are even personal representatives of the casinos who greet all buses with out-of-state license plates, handing out flyers describing their respective casino’s one-time FREE SLOT MACHINE PULL with a huge cash prize. You feel that one pull of the handle at each of the three casinos is all you need. The odds of winning at each casino are fixed to be equal (equally low that is) by the Nevada Gaming Commission.
The Flyers read like this:
• Lose-Here-First Casino offers a $500,000 cash prize
• Thanks-For-Playing Casino offers a $400,000 cash prize
• Come-Back-Soon Casino offers a $1 million cash prize
While the rest of the bus passengers dart to their favorite casinos, you take the time to read the fine print (as required by the Nevada Gaming Commission) on the flyers:
• Lose-Here-First pays 50,000 in annual installments for10 years, beginning one year from now
• Thanks-For-Playing pays $250,000 in one year and $50,000 per year at the end of 2, 3, and 4 years from now
• Come-Back-Soon pays $20,000 per year for 50 years beginning one year from now
Important Assumptions:
You believe that you will live until you are at least 80 and you also know that casino payments to winners are placed in trust to guard against casino bankruptcy so they represent completely safe payments.
You also believe that interest rates will rise substantially after the next 10 years have passed as inflation returns with a vengeance. Therefore, your required rate of return (i.e. your discount rate) is 6% per year for the next 10 full years and 10% per year thereafter.
Since you want to get as rich as possible as quickly as possible, which casino will you head to first, second, and third, and why? (16 points)

Answer 1

Cash Flows
a)	Lose Here First casino - $50000 per year for 10 Years
		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
	Cash flows	50000	50000	50000	50000	50000	50000	50000	50000	50000	50000
	Discount rate for calculation of Present value is 6%
	PV	$368,004.00
b)	Thanks for playing casino
		Year 1	Year 2	Year 3	Year 4
	Cash flows	250000	50000	50000	50000
	Discount rate for calculation of Present value is 6%
	PV	$361,934.50
c)	Come back soon casino - $20000 per year for 50 Years												Cashflows in Year 12 to 49 have also been considered for PV Calculation
		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Year 11	Year 50
	Cash flows	20000	20000	20000	20000	20000	20000	20000	20000	20000	20000	20000	20000
	Discount rate for calculation of Present value is 6% till 10th year and beyond that 10% per year.
	PV	$222,606.70

As the odds of winning at each casino are fixed to be equal (equally low that is) by the Nevada Gaming Commission, hence, the best payout based on PV is given by LOSE HERE FIRST casino so will play here first and then move onto THANKS FOR PLAYING CASINO and then to COME BACK SOON CASINO.