After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large, well-known magazine subscription company. It has arrived with the good news that you are the big winner, having won $27 million. You have three options: Receive $1.35 million per year for the next 20 years. Have $9.75 million today. Have $3.75 million today and receive $1,050,000 for each of the next 20 years. Your financial adviser tells you that it is reasonable to expect to earn 13 percent on investments.

Calculate the present value of each option. (Future Value of $1,Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.)

Determine which option you prefer.

TABLE 11.3A Future Value of an Annuity of $1