Homework Help: MBA Finance

Posted by Anonymous on Sunday, July 31, 2011 at 6:20pm.

Sally has won the grand prize in a lottery and must choose between the following three options:

A. Receive a lump sum payment of $10,000,000

B. Receive annual end of year payments $2,000,000 for the next 8 years:

C. Receive annual end of the year payments of $1,500,000 for the next 20 years:

Which option should Sally chose based on annual investment of rate of 6%?

MBA Finance - Ms. Sue, Sunday, July 31, 2011 at 6:24pm
First -- there's no guarantee today that the investment rate is or will ever be 6% again.

Second, option C. is out if Sally is elderly.

What do you think?
MBA Finance - MathMate, Sunday, July 31, 2011 at 7:38pm
Assume a constant investment rate of 6% indefinitely, and that Sally has a life expectancy of over 20 years.

Also, assume that the winnings are deposited the money in a trust fund independent of the lottery company.

A.
Future value at the end of 8 years
=10M*1.06^8
=15.938M$
Future value at the end of 20 years
=32.071M$

B. future value of 8 yearly payments
=2M$*(1.06^8-1)/(1.06-1)
=19.795M$ > 15.93 M$
i.e. better choice than A.

C. Future value of 20 yearly payments of 1.5M$
=1.5*(1.06^20-1)/(1.06-1)
=55.178M$ > 32.07M$
i.e. better choice than A.

Now compare B and C by investing the future value of B (after 8 years) for the following 12 years at 6%.

Future value of option B after 12 more years
= 19.795M$ * 1.06^12
= 39.831M$ < 55.178M$

Thus option C is by far the most advantageous, assuming all the pre-conditions are met.

Answer this Question

Related Questions

Statistics - A lottery ticket has a grand prize of $28 million. The probability ...
statistic - A lottery ticket has a grand prize of $28 million. The probability ...
Statisics - The state lottery claims that its grand prize is $1 million. The ...
Statisics - The state lottery claims that its grand prize is $1 million. The ...
Statistics - The state lottery claims that its grand prize is $1 million. The ...
stats math - Suppose you are selling raffle tickets for $3.00 each. You have the...
math - 6. A lottery offers two options for the prize. Option A: $1000 a week for...
math - 6. A lottery offers two options for the prize. Option A: $1000 a week for...
MANAGERIAL FINANCE plz help!! - Hi, i need some help on my managerial finance ...
Math 142 - 800 hundred chances are sold at $2 apiece for a raffle. There is a ...

For Further Reading

First Name:
School Subject:
Answer: