Marty has just won the National Magazine Sweepstakes. He has two options for receiving his prize. The first option is to accept a $133,000 cash payment today. The second option is to receive $19,500 at the end of each of the next 12 years and a $37,500 lump sum payment in the 13th year. Marty can invest money at a 8% rate.

Click here to view the factor table.

(a)Calculate the present value of the two options.(For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

Option 1 Option 2 Present value$

$

Which option should Marty choose to receive his winnings?

(b)If the money is invested at 11%, calculate the present value of the two options.(For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

Option 1 Option 2Present value$

$

Which option should he choose?

c09CapitalBudgeting.indd Page 517 23/07/13 8:23 PM f-392 /207/WB01044/9781118548639/ch09/text_s Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 16% 18% 20% 1 2 3 4 5 0.9615 0.9246 0.8890 0.8548 0.8219 0.9524 0.9070 0.8638 0.8227 0.7835 0.9434 0.8900 0.8396 0.7921 0.7473 0.9346 0.8734 0.8163 0.7629 0.7130 0.9259 0.8573 0.7938 0.7350 0.6806 0.9174 0.8417 0.7722 0.7084 0.6499 0.9091 0.8264 0.7513 0.6830 0.6209 0.9009 0.8116 0.7312 0.6587 0.5935 0.8929 0.7972 0.7118 0.6355 0.5674 0.8850 0.7831 0.6931 0.6133 0.5428 0.8772 0.7695 0.6750 0.5921 0.5194 0.8621 0.7432 0.6407 0.5523 0.4761 0.8475 0.7182 0.6086 0.5158 0.4371 0.8333 0.6944 0.5787 0.4823 0.4019 6 7 8 9 10 0.7903 0.7599 0.7307 0.7026 0.6756 0.7462 0.7107 0.6768 0.6446 0.6139 0.7050 0.6651 0.6274 0.5919 0.5584 0.6663 0.6227 0.5820 0.5439 0.5083 0.6302 0.5835 0.5403 0.5002 0.4632 0.5963 0.5470 0.5019 0.4604 0.4224 0.5645 0.5132 0.4665 0.4241 0.3855 0.5346 0.4817 0.4339 0.3909 0.3522 0.5066 0.4523 0.4039 0.3606 0.3220 0.4803 0.4251 0.3762 0.3329 0.2946 0.4556 0.3996 0.3506 0.3075 0.2697 0.4104 0.3538 0.3050 0.2630 0.2267 0.3704 0.3139 0.2660 0.2255 0.1911 0.3349 0.2791 0.2326 0.1938 0.1615 11 12 13 14 15 0.6496 0.6246 0.6006 0.5775 0.5553 0.5847 0.5568 0.5303 0.5051 0.4810 0.5268 0.4970 0.4688 0.4423 0.4173 0.4751 0.4440 0.4150 0.3878 0.3624 0.4289 0.3971 0.3677 0.3405 0.3152 0.3875 0.3555 0.3262 0.2992 0.2745 0.3505 0.3186 0.2897 0.2633 0.2394 0.3173 0.2858 0.2575 0.2320 0.2090 0.2875 0.2567 0.2292 0.2046 0.1827 0.2607 0.2307 0.2042 0.1807 0.1599 0.2366 0.2076 0.1821 0.1597 0.1401 0.1954 0.1685 0.1452 0.1252 0.1079 0.1619 0.1372 0.1163 0.0985 0.0835 0.1346 0.1122 0.0935 0.0779 0.0649 16 17 18 19 20 0.5339 0.5134 0.4936 0.4746 0.4564 0.4581 0.4363 0.4155 0.3957 0.3769 0.3936 0.3714 0.3503 0.3305 0.3118 0.3387 0.3166 0.2959 0.2765 0.2584 0.2919 0.2703 0.2502 0.2317 0.2145 0.2519 0.2311 0.2120 0.1945 0.1784 0.2176 0.1978 0.1799 0.1635 0.1486 0.1883 0.1696 0.1528 0.1377 0.1240 0.1631 0.1456 0.1300 0.1161 0.1037 0.1415 0.1252 0.1108 0.0981 0.0868 0.1229 0.1078 0.0946 0.0829 0.0728 0.0930 0.0802 0.0691 0.0596 0.0514 0.0708 0.0600 0.0508 0.0431 0.0365 0.0541 0.0451 0.0376 0.0313 0.0261 PVn,i = $1 (1 + i)n APPENDIX 9-1 Present value of $1 received in n periods. Periods 4% 1 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 16% 18% 20% 2 3 4 5 0.9615 1.8861 2.7751 3.6299 4.4518 0.9524 1.8594 2.7232 3.5460 4.3295 0.9434 1.8334 2.6730 3.4651 4.2124 0.9346 1.8080 2.6243 3.3872 4.1002 0.9259 1.7833 2.5771 3.3121 3.9927 0.9174 1.7591 2.5313 3.2397 3.8897 0.9091 1.7355 2.4868 3.1698 3.7907 0.9009 1.7125 2.4437 3.1024 3.6959 0.8929 1.6901 2.4018 3.0373 3.6048 0.8850 1.6681 2.3612 2.9745 3.5172 0.8772 1.6467 2.3216 2.9137 3.4331 0.8621 1.6052 2.2459 2.7982 3.2743 0.8475 1.5656 2.1743 2.6901 3.1272 0.8333 1.5278 2.1065 2.5887 2.9906 6 7 8 9 10 5.2421 6.0021 6.7327 7.4353 8.1109 5.0757 5.7864 6.4632 7.1078 7.7217 4.9173 5.5824 6.2098 6.8017 7.3601 4.7665 5.3893 5.9713 6.5152 7.0236 4.6229 5.2064 5.7466 6.2469 6.7101 4.4859 5.0330 5.5348 5.9952 6.4177 4.3553 4.8684 5.3349 5.7590 6.1446 4.2305 4.7122 5.1461 5.5370 5.8892 4.1114 4.5638 4.9676 5.3282 5.6502 3.9975 4.4226 4.7988 5.1317 5.4262 3.8887 4.2883 4.6389 4.9464 5.2161 3.6847 4.0386 4.3436 4.6065 4.8332 3.4976 3.8115 4.0776 4.3030 4.4941 3.3255 3.6046 3.8372 4.0310 4.1925 11 12 13 14 15 8.7605 9.3851 9.9856 10.5631 11.1184 8.3064 8.8633 9.3936 9.8986 10.3797 7.8869 8.3838 8.8527 9.2950 9.7122 7.4987 7.9427 8.3577 8.7455 9.1079 7.1390 7.5361 7.9038 8.2442 8.5595 6.8052 7.1607 7.4869 7.7862 8.0607 6.4951 6.8137 7.1034 7.3667 7.6061 6.2065 6.4924 6.7499 6.9819 7.1909 5.9377 6.1944 6.4235 6.6282 6.8109 5.6869 5.9176 6.1218 6.3025 6.4624 5.4527 5.6603 5.8424 6.0021 6.1422 5.0286 5.1971 5.3423 5.4675 5.5755 4.6560 4.7932 4.9095 5.0081 5.0916 4.3271 4.4392 4.5327 4.6106 4.6755 16 17 18 19 20 11.6523 12.1657 12.6593 13.1339 13.5903 10.8378 11.2741 11.6896 12.0853 12.4622 10.1059 9.4466 10.4773 9.7632 10.8276 10.0591 11.1581 10.3356 11.4699 10.5940 8.8514 9.1216 9.3719 9.6036 9.8181 8.3126 8.5436 8.7556 8.9501 9.1285 7.8237 8.0216 8.2014 8.3649 8.5136 7.3792 7.5488 7.7016 7.8393 7.9633 6.9740 7.1196 7.2497 7.3658 7.4694 6.6039 6.7291 6.8399 6.9380 7.0248 6.2651 6.3729 6.4674 6.5504 6.6231 5.6685 5.7487 5.8178 5.8775 5.9288 5.1624 5.2223 5.2732 5.3162 5.3527 4.7296 4.7746 4.8122 4.8435 4.8696 $1 - PVAn,i = 1 (1 + i)n i APPENDIX 9-2 Present value of an annuity of $1 per period. Chapter Summary 517