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NOTE: Throughout this lab, every time a screenshot is requested, use your computer's screenshot tool, and paste each screenshot to the same Word document. Label each screenshot in accordance to what is noted in the lab. This document with all of the screenshots included should be uploaded through Connect as a Word or PDF document when you have reached the final step of the lab.

In this lab, you will:

Required:

You win the lottery (yay!) and youre trying to decide whether to take the $4,250,000 one-time lump sum or get $200,000 annually for life. Assume youre 25 years old and expect to live until youre 88. Determine whether you should take the $4,250,000 as a lump sum payment or get $200,000 per year for life using net present value (NPV) and internal rate of return (IRR) analyses.

Ask the Question: Should you take $4,250,000 as a lump sum payment or get $200,000 per year for life?

Master the Data: Apply the same steps as Lab 9-1 to the Lab 9-1 Alt Data.xlsx dataset.

Well do two types of analyses, net present value analysis using the Excel NPV() function as well as internal rate of return analysis using IRR(). Well build the spreadsheet together to help perform this analysis.

Note the differences between Lab 9-1 Alt and Lab 9-1.

1. The net present value of cash flows should be evaluated using 3, 5, and 7 percent discount rates (different from the 4, 6, and 8 percent used in Lab 9-1).
2. The annuity is paid from age 25 to age 88 (different from the age 86 in Lab 9-1).

Software needed

• Excel
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd+Shift+4)

Data: Excel File Lab 9-1 Alt Data.xlsx.

Perform the Analysis: Refer to Lab 9-1 Alternate in the text for instructions and Lab 9-1 steps for each the of lab parts.

Share the Story: Cash flow valuation is an important valuation activity both for the accountant and the investor. Communicate the findings of the cash flow analysis and assist the decision maker in their decision making.

rev: 09_21_2020_QC_CS-228676

Required:

1. According to the IRR analysis, what is the indifference interest rate between a $4,250,000 lump sum and a $200,000 annuity between the ages of 25 and 88?

multiple choice 1

• 4.66%

• 5%

• 3%

• 4.99%

2. What is the net present value today of a $4,250,000 lump sum payment received today?

multiple choice 2

• $3,823,825

• $5,661,295

• $4,250,000

• $2,819,527

3. What is the net present value today of a $200,000 annuity payment from age 25 to 88 assuming a 5% discount (interest rate)?

multiple choice 3

• $2,819,527

• $4,250,000

• $5,661,295

• $3,823,825

4. What is the net present value today of a $200,000 annuity payment from age 25 to 88 assuming a 3% discount (interest rate)?

multiple choice 4

• $4,250,000

• $3,823,825

• $5,661,295

• $2,819,527

5. What is the net present value today of a $200,000 annuity payment from age 25 to 88 assuming a 7% discount (interest rate)?

multiple choice 5

• $5,661,295

• $4,250,000

• $2,819,527

• $3,823,825