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FIN 301 Fall 2010 HW1 Solutions

# FIN 301 Fall 2010 HW1 Solutions - FIN301 Fall 2010 HW1...

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FIN301 Fall 2010, HW1 Solutions P1 a. Colorado Lotto: Cash value=0.4x → Choose Annuity Connecticut: Cash value=0.57x → Choose Annuity Michigan: Cash Value=0.5x → Choose cash value b. Using EAR=8%, repeat the calculation in a Colorado Lotto: Cash value=0.4x → Choose Annuity Connecticut: Cash value=0.57x → Choose cash value Michigan: Cash Value=0.5x → Choose cash value

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c. John: Cash value=1,000,000*0.4=400,000 Annuity=1,000,000*0.46115033=461,150.33 John will choose the annuity which worth \$461,150.33. Jill: Cash value=1,000,000*0.57=570,000 Annuity=1,000,000*0.51514988=515,149.88 Jill will choose the cash value, so the winnings are worth \$570,000. Jack: Cash value=1,000,000*0.5=500,000 Annuity=1,000,000*0.4052802=405,280.2 Jack will choose the cash value so that his winnings will worth \$500,000. The difference between the highest and the lowest value: \$570,000-\$461,130.33=\$108,849.67. P2
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FIN 301 Fall 2010 HW1 Solutions - FIN301 Fall 2010 HW1...

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