A lottery winner will receive $2 million at the end of each of the next fourteen...

A lottery winner will receive $2 million at the end of each of the next fourteen years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.2% per year?

A. $78.61 million

B. $49.13 million

C.$68.78million

D. $39.30 million

A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000. Which of the following is closest to the interest rate being offered by the dealer?

A. 7.8%

B. 5.8%

C.6.8%

D. 9.8%

Solutions

Expert Solution

Question 1 - Option B 49.13 million

Future Value at the end of 14th Year = Annual Payment * Future Value Annuity Factor 8.2%, 14 Years

Future Value = 2 * 24.56 = 49.128 million

Alternatively it can also be calculated as using table as shown below

Year	Compounded for (Years)	Cash Flow	Future Value @8.2%
1	13	2	5.57
2	12	2	5.15
3	11	2	4.76
4	10	2	4.40
5	9	2	4.07
6	8	2	3.76
7	7	2	3.47
8	6	2	3.21
9	5	2	2.97
10	4	2	2.74
11	3	2	2.53
12	2	2	2.34
13	1	2	2.16
14	0	2	2.00
			49.12

Question 2 - Option C 6.8%

This question is to be calcualted using IRR formulae,

IRR is the discount rate at which present value of all the cash flows is equal to initial investment

we will consider the price of truck of 120000 to be the initial outflow at year 0, and find out the discount rate at which 25000 payment for 6 years will be equal to 120000 using IRR formulae in excel

Year	Cash Flow
0	-120000
1	25000
2	25000
3	25000
4	25000
5	25000
6	25000
IRR	6.77%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

The state lottery claims that its grand prize is $2 million. The lucky winner will receive...

The state lottery claims that its grand prize is $2 million. The lucky winner will receive $200,000 upon presentation of the winning ticket plus $200,000 at the end of each year for the next 19 years. Assume your own discount rate. a-Why isn't this really a million-dollar prize? (5 Points) b-What would it actually be worth in dollars to you? (5 Points) c-What would the 20 yearly payments need to be for the present value of the lottery to be...

Kimberly Young, a lottery winner, will receive the following payments over the next seven years. She...

Kimberly Young, a lottery winner, will receive the following payments over the next seven years. She has been approached by an investor who will pay Kimberly a lump sum today for the rights to those future cash flows. If she can invest her cash flows in a fund that will earn 11.0 percent annually, how much should Kimberly require the investor to pay for the cash flows? (Round answer to 2 decimal places, e.g. 15.25. Do not round factor values.)...

You just won the lottery and will receive $14,000 at the end of each of the...

You just won the lottery and will receive $14,000 at the end of each of the next 10 years. Your friend offers to give you a flat $100,000 for the 10 years' worth of income flows right now. If you expect a return of 7% on any surefire investment, how much do you think these lottery winnings are worth to you today? (FORMAT: XX,XXX.XX DO NOT INCLUDE A DOLLAR SIGN)

the Florida lottery Agrees to pay the winner $283,000 at the end of the year for...

the Florida lottery Agrees to pay the winner $283,000 at the end of the year for the next 20 years. What is the future value of this prize if each payment is put in an account earning 0.09?

The winner of a state lottery is offered the following three options: i. Receive 10...

The winner of a state lottery is offered the following three options: i. Receive 10 million dollars now. ii. Receive 7 million dollars now and 7 million dollars in 10 years. iii. Receive 1 million dollars at the end of each year for the next 20 years. Use an interest rate of 4% per year compounded annually to determine the best option for the lottery winner. Use an interest rate of 8% per year compounded annually to...

A state lottery commission pays the winner of the Million Dollar lottery 20 installments of $50,000/year....

A state lottery commission pays the winner of the Million Dollar lottery 20 installments of $50,000/year. The commission makes the first payment of $50,000 immediately and the other n = 19 payments at the end of each of the next 19 years. Determine how much money the commission should have in the bank initially to guarantee the payments, assuming that the balance on deposit with the bank earns interest at the rate of 4%/year compounded yearly. Hint: Find the present...

A state lottery commission pays the winner of the Million Dollar lottery 20 installments of $50,000/year....

A state lottery commission pays the winner of the Million Dollar lottery 20 installments of $50,000/year. The commission makes the first payment of $50,000 immediately and the other n = 19 payments at the end of each of the next 19 years. Determine how much money the commission should have in the bank initially to guarantee the payments, assuming that the balance on deposit with the bank earns interest at the rate of 5%/year compounded yearly. Hint: Find the present value...

Clive & Co. will deposit $2 million at the end of each of the next three...

Clive & Co. will deposit $2 million at the end of each of the next three years in a structured product expecting to pay 9% interest. Clive and Co. currently has $800,000 in the trust. How much will Clive & Co. have in 3 years?

1. You have won the lottery and will receive $20,000 each year for the next 20...

1. You have won the lottery and will receive $20,000 each year for the next 20 years! A financial services company has offered you an upfront payment of $200,000 for the entire income stream. If you estimate the time value of money for you is 5%, would you accept the offer? Explain. 2. A family spends $45,000 on living expenses. If inflation averages 3% over the next 5 years, how much would the family need to spend after 5 years...

9. You have won the lottery and will receive $20,000 each year for the next 20...

9. You have won the lottery and will receive $20,000 each year for the next 20 years! A financial services company has offered you an upfront payment of $200,000 for the entire income stream. If you estimate the time value of money for you is 5%, would you accept the offer? Explain.

Subjects