(Calculating the present value of annuities, LO 2) Answer the following questions:

a. A contest promotes that the winner wins $1,000,000. The $1,000,000 prize is paid in equal installments over 20 years, with the first payment being made one year from the date the contest winner is announced. What is the “real” (present)

value of the prize? Assume a discount rate of 8%.

b. You have the option of receiving $100,000 today or $12,000 a year “fel 15 years, beginning one year from now. If your discount rate is 10%, which would you choose?

c. A store allows you to purchase a new computer for $100 down and $25 a month for 50 months. If the appropriate discount rate is 1% per month, what would be the equivalent cash price today for the computer?

d. An investor can purchase an investment that pays interest of $100 per year for ten years as well as paying the investor $1,000 in the tenth year. If the appropri- ate discount rate for an investment of this type is 12%, what is the maximum amount that the investor should pay for the investment? (When answering, remember that calculating an annuity only applies to equal payments. In this question, the present value of the additional $1,000 received in the tenth year must be determined separately.)