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1) Congratulations! You just won the lottery! You can elect to receiv

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1) Congratulations! You just won the lottery! You can elect
to receive your prize in one of four payment streams: (i)
$1,000,000 now (ii) $1,500,000 at the end of five years (iii)
$60,000 per year in perpetuity, with payments made at the
end of each year (so your first payment comes one year
from today) (iv) $150,000 per year for the next ten years,
with payments made at the end of each year (so your first
payment comes one year from today) Suppose the annual
interest rate is 5%, calculate the present value of each of
the four payment options (i.e., in today\'s dollars). Rank for
four options from most to least valuable. You can use
Excel or a calculator to solve this, but you must show the
formulas you use.
Solution
Present Values of different cash flow options:
1) $1,000,000 to be received now will have a PV of:
$1,000,000.
2) $1,500,000 at the end of 5 years will have a PV of:
PV = FV / (1 + I/Y)N
PV = $1,500,000 / (1.05)5
PV = $1,175,289.25
3) $60,000 for year in perpetuity will have a PV of:
PV of perpetuity = Periodic payment / Interest rate
PV of perpetuity = $60,000 / 0.05 = $1,200,000.

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1) Congratulations! You just won the lottery! You can elect to receive your prize in one of four payment streams: (i) $1,000,000 now (ii) $1,500,000 at the end of five years (iii) $60,000 per year in perpetuity, with payments made at the end of each year (so your first payment comes one year from today) (iv) $150,000 per year for the next ten years, with payments made at the end of each year (so your first payment comes one year from today) Suppose the annual interest rate is 5%, calculate the present valu e of each of the four payment options (i.e., in today \'s dollars). Rank for four option ...
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