fx 1 A B 2 3 WINNING THE LOTTERY! C D E F G H 682990 Score: 8 /19 758160 751300 J K L M N 1100000 P Q R S T U V W X 200000 200000 200000 200000 200000 1000000 4 Toni won the Washington State Lottery. She was 5 given three options for receiving her winnings. 6 Toni uses a discount rate of 10% in making her decision. 7 8 PV at 10% Show cash flow each year, even if it's 0. 9 0 1 2 3 4 10 Option 1 Receiving $1.1 million at the end of five years. 682,990 1100000 0.6 11,000 5 Cash flows 11 Check 1 12 13 PV at 10% 14 0 1 2 3 4 5 15 Option 2 Receiving $200,000 per year for 5 years. 758,140 200,000 200,000 200,000 200,000 200,000+ Cash flows 16 Check 1 1 1 1 1 17 18 19 PV at 10% 0 1 20 Option 3 Receiving $1 million at the end of 3 years. 751,300 751300 1000000 2 3 4 5 + Cash flows 21 Check 22 23 24 25 Question: Which option should Toni choose to maximize her present value? 26 Answer: 2. Receiving $200,000 per year for 5 years. 1 27 28 29 PRESENT VALUE OF $1.00 Per. 1 4% 6% 0.9615 0.9434 2 0.9246 3 0.889 4 0.8548 5 0.89 0.8396 0.7921 0.8219 0.7473 8% 9% 10% 12% 0.9259 0.9174 0.9091 0.8929 0.8573 0.8417 0.8264 0.8116 0.7972 0.7561 0.7938 0.7722 0.7513 0.7312 0.7118 0.6575 0.735 0.7084 0.683 0.6587 0.6355 0.5718 0.6806 0.6499 0.6209 0.5935 0.5674 0.4972 11% 0.9009 15% 0.8696 4% 0.9615 PRESENT VALUE OF A SERIES OF $1.00 CASH FLOWS Per. 1 9% 2 1.8861 4 3 2.7751 3.6299 5 4.4518 6% 8% 10% 0.9434 0.9259 0.9174 0.9091 0.9009 0.8929 0.8696 1.8334 1.7833 1.7591 1.7355 1.7125 1.6901 1.6257 2.673 2.5771 2.5313 2.4869 2.4437 2.4018 2.2832 3.4651 3.3121 3.2397 3.1699 3.1024 3.0373 2.855 4.2124 3.9927 3.8897 3.7908 3.6959 3.6048 3.3522 11% 12% 15% 30 31