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 $22.1 million. You discover that you have three options: (1) you can receive $2.21 million per year for the next 12 years, (2) you can have $19.5 million today, or (3) you can have $5.4 million today and receive $1.70 million for each of the next 10 years. Your lawyer tells you that it is reasonable to expect to earn an annual return of 10% on investments.

Required:

What is the present value of the above options?

Question

Business

Alexia Norman

28 December, 11:43

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 $22.1 million. You discover that you have three options: (1) you can receive $2.21 million per year for the next 12 years, (2) you can have $19.5 million today, or (3) you can have $5.4 million today and receive $1.70 million for each of the next 10 years. Your lawyer tells you that it is reasonable to expect to earn an annual return of 10% on investments.

Required:

What is the present value of the above options?

+2

Answers (1)

Know the Answer?

Trinity Norman · Answer 1

Option 2 is best option on the basis of present value analysis of all the options available.

Explanation:

Option 1 NPV = ($2.21 Annual Inflow * 6.814 Annuity Factor 12 year @10%) = $15.06m

Option 2 NPV = $19.5m

Option 3 NPV = $5.4m + ($1.7m Annual Inflow * 6.145 Annuity Factor for next 10 years @10%) = $15.85m

From the above options the best option available is option 2 which is worth more in todays prices than other options available.