QUESTION ON

(A) Alfred Banda, a legal practitioner, has just won lottery amounting to K2,000,000. There has been an agreement between the Lottery Company and Alfred regarding the way payments will be made. The two parties have agreed to an equal annual instalments of K500,000. The lottery is not paying him immediately. The first payment will be made at the end of the sixth year.

Assume that the opportunity cost of capital is 15%.

i.Find the future value of the payment.[5 Marks]

ii.Suppose that the alternative to receiving the money in instalments is to receive immediate cash amounting to K1,500,000. Which option would you advise Alfred to accept? Explain. [5 Marks]