Question
You received a notice on January 1 saying that you are a finalist in a publishers $5 million sweepstakes, to be awarded on December 31.
You received a notice on January 1 saying that you are a finalist in a publishers $5 million sweepstakes, to be awarded on December 31. You believe in planning ahead, so you want to decide which of their three payment options to accept:
Option 1: Receive $5 million in one lump sum on Jan. 1.
Option 2: Receive $167,000 on December 31, and on each (29) succeeding December 31, for a total of 30 annual payments
Option 3: Receive $14,000 on Feb. 1, and every month thereafter for a total of 360 months
Now calculate the present value of each option. Assume an interest rate of 9%. (The present value of an annuity of $1 at 9% for 30 periods is 10.274. The present value of an annuity of $1 at .75% (9% / 12) for 360 periods is 124.28. Which option now is more attractive?
PV of Option1 is _______
PV of Option2 is _______
PV of Option3 is _______
_________ is the most attractive option.
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