Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Chen wins the lottery! He has a choice between Option A: $21,000,000.00 received today. Option B: 10 payments of $3,053,532.22 at the start of every

image text in transcribed

Chen wins the lottery! He has a choice between Option A: $21,000,000.00 received today. Option B: 10 payments of $3,053,532.22 at the start of every year for 10 years, with the first payment today. The nominal annual interest rate is i(4) = 10.000%. Chen wants you to advise them which option to choose. a) Build a spreadsheet (see the posted example) to compare the present value of the 2 options. Which would you recommend? b) Suppose instead you assumed they would never spend any of the money, instead saving it all until the time of the last payment of Option B. Find the future value of both options at this time. Would this calculation change your recommendation? c) If the interest rate were ;4) = 5.000% instead, would that change which option you recommend? d) Obviously there is some interest rate i4) at which the present value of the two options is the same. Find that value (accurate to 3 decimal places, e.g. 3.456%) using either trial and error or goal seek. (Warning: if you are using trial and error using only 3 decimal places for the interest rate, the present values you compute might not match exactly

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance An Integrated Planning Approach

Authors: Ralph R Frasca

8th edition

136063039, 978-0136063032

More Books

Students also viewed these Finance questions