Mary Alice just won the lottery and is trying to decide between the options of r
ID: 2527823 • Letter: M
Question
Mary Alice just won the lottery and is trying to decide between the options of receiving the annual cash flow payment option of $420,000 per year for 25 years beginning today, or receiving one lump-sum amount today. Mary Alice can earn 6% investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided and round final answer to nearest whole dollar amount.)
$5,369,011
$6,111,151
$5,691,151
$10,500,000
Explanation / Answer
Answer: Option A ($5,369,011)
Explanation:
It wouid be indifferent between two alternatives when lumpsum amount is created by bringing the alernative 1 cash flows($420,000 ) in the present value by using the PVAF@(6%,25Y)
Lumpsum amount = $420,000 * PVAF@(6%,25Y)
= $420,000 *12.78336
=$5369011.2
= $5369011
Therefore if the lumpsum amount is $5369011 she would be indifferent between the two alternatives.