Question

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 $17.4 million. You discover that you have three options: (1) you can receive $1.74 million per year for the next 11 years, (2) you can have $15.3 million today, or (3) you can have $4.9 million today and receive $1.45 million for each of the next 9 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).) Present Value Option 1 Option 2 Option 3

Answer 1

Ans:

Option 1:

Present value=1.74*Present value of annuity(10%,11)

=1.74*6.495

=$11,301,300

Option 2:

Present value=$15.3 million

Option 3:

Present  value=[4.9+1.45*present value of annuity(10%,9))

=[4.9+1.45*5.759]

=$13,250,550 (approx)

Hence option 2 is better having a higher present value.