Assume that you have won the Publishers Clearing House Sweepsteaks. When you are
ID: 2389492 • Letter: A
Question
Assume that you have won the Publishers Clearing House Sweepsteaks. When you are contacted about your winnings, you are offered the following three payout options:a. Receive $10,000,000 in cash today.
b. Receive $2,200,000 today and $1,050,000 per year for 15 years, with the first $1,050,000 payment being received one year from today.
c. Receive $1,200,000 per year for 15 years, with the first payment being received one year from today.
Assuming the effective rate of interst is 12% and using the present value concepts presented in Chapter 14, which option should you select? Explain your answer and give supportion calculations.
Explanation / Answer
a)Present Value =$10,000,000 b)Present Value = $2,200,000 + $1,050,000/1.12 + $ 1,050,000/1.12^2 ....+$1,050,000/1.12^15 = $9,351,407.71 c)Present Value = $1,200,000/1.12 + $1,200,000/1.12^2 .... + $1,200,000/1.12^15 = $8,173,037.39 Option (a) should be selected with highest present value