CP 14-3 Present Values

Alex Kelton recently won a jackpot in the Colorado lottery while he was visiting his parents. When he arrived at the lottery office to collect his winnings, he was offered the following three payout options:

a. Receive $100,000,000

b. Receive $25,000,000 today and $9,000,000 per year for 8 years, with the first payment being received one year from today.

c. Receive $15,000,000 per year for 10 years, with the first payment being received one year from today.

Assuming that the effective rate of interest is 7% which payout option should Alex select? Use the present value tables in Appendix A . Explain your answer and provide any necessary supporting calculations.