1.Tedjustwonthelottery,andhemustchooseamongthreeawardoptions.Hecanelecttoreceivealumpsumtodayof$61m,toreceive10paymentsof$9.5millionperyearattheendofeachyear(thefirstpaymentoccursoneyearfromnow),ortoreceive30paymentsof$5.5millionperyearattheendofeachyear(thefirstpaymentoccursoneyearfromnow).

• Ifhethinkshecanearn7%annually,whichshouldhechoose?(3marks)
• Ifhethinkshecanearn9%annually,whichisthebestchoice?(3marks)
• Explainhowinterestratesinfluencetheawardoptions.

2. You borrow $50,000 repayable in monthly instalments over 10 years. The nominal interest rate is 12% per annum. After 3 years have passed, the lender increases the interest rate to 13.5% per annum and you are given the choice of either increasing the monthly repayment or extending the term of the loan.

• What would be the new monthly repayment? (5 marks)
• Whatwouldbethenewloanterm?(2marks)(Note:studentsmayusethefollowingformulatosolvefort)
• t= (log(C/(C-P*r)))/(log(1+r))
• t= number of period;
• C=payment;
• P=Present value; and
• r=interest rate.t= (log(C/(C-P*r)))/(log(1+r))t= number of period;C=payment;P=Present value; andr=interest rate.

.