Question
Your friend won a lottery! However, the winner was not knowledgeable in finance but was aware that you are a student of finance at USQ.
Your friend won a lottery! However, the winner was not knowledgeable in finance but was aware that you are a student of finance at USQ. He did not want to share his secret with anyone in the neighbourhood except you of course. He was given a choice between accepting a lump sum of $200,000,000 or an immediate payment of $20,000,000 now and a further $20,000,000 every year for the next 10 years (making 11 payments of $20,000,000) at a time when the alternative investment rate was 6% per annum.
His concern was that he will be getting either $220,000,000 in eleven payments or $200,000,000 upfront. He wants to know which option is truly better. Since he heard about time value of money and annuities, he thought he should check with you which option is more valuable for him. What would be your recommendation for your friend?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started