Congratulations! Youve won a state lotto! The state lottery offers you the following (after-tax) payout options:

Option #1: $13,000,000 after five years

option #2: $2,050,000 per year for the next five years

option #3: $12,000,000 after three years.

a) assuming you can earn 10% on your funds, which option would you prefer? (round your answers to nearest whole dollar)

The present value of the payout is:

option #1:_________

Use the NPV method to determine whether Vargas products should invest in the following projects:

Project A: Costs $290,000 and offers eight annual net cash inflows of $54,000. Vargas products requires an annual return of 12% on projects like A.

Project B: Costs $380,000 and offers 9 annual net cash inflows of $70,000. Vargas Products demands an annual return of 10% on investments of this nature.

a. what is the NPV of each project?

Complete the table to calculate the net present value under each project. (use parentheses or minus sign for negative net present values)

Vargas Products

Net Present Value Analysis

Present value at 12%;10%| inflow | value

Project A: ______________________*_______per year______

investment _______

net present value of project A ________

present value of annuity of equal annual net cash inflows

b. What is the maximum acceptable price to pay for each project?

c. what is the profitability index of each project?

Project B:

Present value of annuity of equal annual net cash inflows ___________*__________ per year _____________

investment ________________

net present value of project B ______________

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Use the net present value method to determine whether Stenback Products should invest in the following projects:

Project A: Costs $305,000 and offers eight annual net cash inflows of $65000. Stenback Products requires an annual return of 16% on projects like A.

Project B: Costs $405,000 and offers 9 annual net cash inflows of $84,000. Stenback products demands an annual return of 14% on investments of this nature.

1. compute the IRR of each project, and use this information to identify the better investment.

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You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to draw $230,000 per year for the next 40 years (based on family history, you think you'll live to age 80). You plan to save by making 15 equal annual installments (from age 25 to age 40) into a fairly risky investment fund that you expect will earn 14% per year. You will leave the money in this fund until it is completely depleted when you are 80 years old.

1.How much money must you accumulate by retirement to make your plan work? (hint: find the present value of the $230,000 withdrawals)

2. How does this amount compare the total amount you will draw out of the investment during retirement ? How can these numbers be so different?

3. How much must you pay into the investment each year for the first 15 years? (hint: your answer from requirement 1 becomes the future value of this annuity)

4. How does the total "out-of-pocket" savings compare to the investment's value at the end of the 15-year savings period and the withdrawals you will make during retirement?