Question
1. You have just won the prize in the State lottery. A recent innovation is to offer prize winners a choice of payoffs. You must
1. You have just won the prize in the State lottery. A recent innovation is to offer prize winners a choice of payoffs. You must choose one of the following prizes:
a. $1,000,000 paid immediately b. $600,000 paid exactly one year from today, and another $600,000 paid exactly 3 years from today c. $70,000 payment at the end of each year forever (first payment occurs exactly 1 year from today) d. An immediate payment of $600,000, then beginning exactly 5 years from today, an annual payment of $50,000 forever
e. An annual payment of $200,000 for the next 7 years (first payment occurs exactly 1 year from today) You believe that 8% p.a. compounded annually is an appropriate discount rate. Assuming you wish to maximize your current wealth, which is the best prize?
2. Kate's financial advisor tells her that she wil need $2 million to fund her retirement. She plans to work for another 30 years before retiring. She will make 30 contributions to a pension. How much will each contribution be, if the interest rate is 9% p.a?
3. Mary has just retired and has $1 miliom in her retirement account. Her bank offers an arrangement whereby the bank takes her $1 million now and pays her $110,000 at the end of each year for the next 20 years. Is it a fair deal, if the offered rate is 10%p.a?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started