Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

GIVEN: Caroline Balfort, was one of the winners of the lottery.She was given three options for receiving her money: 1) $400,000 cash instantly; 2) $133,000

GIVEN: Caroline Balfort, was one of the winners of the lottery.She was given three options for receiving her money:

1) $400,000 cash instantly;

2) $133,000 cash immediately along with a six-period annuity of $24,000 starting one-year from today, or

3) a six-period annuity of $30,000 starting one year from today.

The lottery office informed Caroline that the interest rate is 8%.What option should Caroline choose?

_______________________________________

Need help! I am hung up on the fact that the annuity "starts one year from today". For options 2 & 3, below, which number in green should I use? I initially thought that I'd just use the regular annuity calculation by looking up the present value annuity in a table. But isn't that number assuming that you'd start collecting the annuity immediately? Or does it take into account that you'd start one year from today? I think I'm overthinking this question. My gut is telling me to go with the green values on the left instead of the alternate green values on the right. Either way, this doesn't change my answer that she should go with Option 1 because it gives the highest present value by far.

Thanks!

image text in transcribed

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

Introduction To Financial Accounting

Authors: Charles T Horngren, Gary L Sundem

10th Edition

136122973, 978-0136122975

More Books

Students also viewed these Accounting questions