FIN 301 Fall 2010 HW1 - FIN 301 Fall 2010 Homework 1...

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FIN 301 Fall 2010 Homework Assignments Homework 1 (Due by 4:00pm on October 1) Problem 1 Large jackpots in most U.S. lotteries are paid out in equal annual installments. The winner can also request immediate payment, but in this case the jackpot is reduced and only the so called “cash value” is paid out. 1 In Colorado for example, large jackpots are paid out in 25 equal installments (with the first installment payable immediately when the winner is confirmed) and the cash value is 40% of the total jackpot. So if you happened to win $1,000,000 on the Colorado Lotto, you would receive $1,000,000/25 = $40,000 right now, another $40,000 one year from now etc. until all 25 installments have been paid. Alternatively, you could tell the Lotto administrator that you want to receive the cash value of $1,000,000 × 0.40 = $400,000 right now. Below you will find the number of annual installments and the cash value for three popular U.S. lotteries: Lottery Number Of Annual Installments Cash Value Colorado 25 40% Connecticut 21 57% Michigan 30 50% a. Suppose the annual interest rate (EAR) is 6%. Would you choose the installments or the cash value if you won a large sum on the Colorado Lotto? How about the Connecticut - Classic lotto? The Michigan - Classic Lotto 47? b. Suppose instead that the annual interest rate (EAR) is 8%. Would you choose the installments or the cash value if you won a large sum on the Colorado Lotto? How about the Connecticut - Classic lotto? The Michigan - Classic Lotto 47? c. Suppose John won $1,000,000 on Colorado Lotto, Jill won $1,000,000 on Connecticut’s Classic lotto and Jack won $1,000,000 on Michigan’s Classic Lotto 47. The interest rate (EAR) is 8%. John, Jill and Jack use this interest rate to choose between the installments
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This note was uploaded on 11/01/2011 for the course BUSINESS FIN301 taught by Professor Andrew during the Fall '10 term at University of Alberta.

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FIN 301 Fall 2010 HW1 - FIN 301 Fall 2010 Homework 1...

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