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Score
1.
Assume
that you have just won the lottery.
You have two payout
options.
First,
you can agree to take 30 equal annual
payments,
with the first payment
to be
made today at Year 0 and the last payment
to be made at Year 29.
Alternatively,
using an effective
annual
rate of 6.9 percent,
the lottery is willing
to convert
the
annual
payments
into an equivalent
lump sum payment
today of $5,627,839.38.
You have no immediate
need for this money
and plan to simply
invest and hold
the money
until Year 40, and believe
that you can earn an effective
annual
rate
of 8.95 percent
over each of the next 40 years.
Looking
at your possible
ending
values
at Year 40, you should
be able to determine
that you will be better off
taking the lump sum value today
rather than taking the yearly
cash flows.
Given
this information,
determine
the difference
in dollar values
at Year 40 between
the
two options.
*
A.
B.
C.
D.
E.
$26,854,504.94
$27,933, 131.9~
$29,011,758.92
$30,090,385.91
$31,169,012.90
Determine
the Amount
of the Annual
Payments:
Set Calculator
to BEGIN of Period:
N
=
30; INR
=
6.9; PV
=
-5,627,839.38;
Solve for PMT
=
$420,000.00
Determine
Value of Lump Sum at Year 40:
N
=
40; INR
=
8.95; PV
=
-5,627,839.38;
Solve for FV
=
$173,552,581.26
=
V
40
Determine
Value of Annual
Cash
Flow at Year 40:
Set Calculator
to BEGIN of Period:
Find Value at Year 0 at 8.95%:
N
=
30; INR
=
8.95; PMT
=
420,000;
Solve for PV
=
$4,722,043.69
Now Convert
to Value at Year 40:
N
=
40; INR
=
8.95; PV
=
-4,722,043.69;
Solve for FV
=
$145,619,449.29
Alternatively,
Set Calculator
to END of Period
FIN 5405 - Quiz
2
Solutions - OEM 2009 Program - Code A
Page
2