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PLEASE COMPLETE IN EXCEL AND SHOW ALL STEPS AND EXCELL EQUATIONS USED In our class example,...

PLEASE COMPLETE IN EXCEL AND SHOW ALL STEPS AND EXCELL EQUATIONS USED

In our class example, I simplified the “annuity” prize option by assuming level, equal annual payments. Actually, this annuity prize option us now on an annuitized prize payment schedule with 30 beginning of year payments that start at a lower amount with each successive payment being 5% higher than the previous annual payment. The sum of these 30 annuitized payments equal the announced estimated jackpot amount with a lower one-time lump-sum payment also being available as the Cash Option.

A recent Powerball estimated jackpot amount is $167 million which is the undiscounted sum of the 30 annuity option payments with a Cash Option of $103.5 million. The first payment under the Annuity Option which would occur immediately is $2,513,590 with 29 additional annual payments with each payment being 5% larger than the previous one. Using this information and assuming you demand a 3% annual return, would you prefer the Annuity Option or the Cash Option if you have the winning ticket? Please include the following to support your decision:

1. A complete schedule of all 30 annual payments under the Annuity Option.

2. A comparison of the present value of all the payments under the Annuity Option and the present value of the Cash Option.

3. Your decision.

Expert Solution

Payment No. 2 = Payment No. 1 * (1 + Growth) = 2513590 * 1.05 = $2639269.50

Payment No. 3 = Payment No. 2 * (1 + Growth) = 2639269.50 * 1.05 = $2771232.98

* Please refer to present value factor table to get PV factors

2. A comparison of the present value of all the payments under the Annuity Option and the present value of the Cash Option.

present value of annuity cash flows = $101.05 Million

present value of cash Option = $103.50 Million

Present value of cash option is higher than PV of annuity option

3. Your decision. PV of cash option is recommended as it gives higher present value

*Please comment if you face any difficulty and please don't forget to provide positive rating*

jeff jeffy answered 1 year ago

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