Kristina just won the lottery and she must choose among thre

Kristina just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $64 million, to receive 10 end-of-year payments of $9.7 million, or to receive 30 end-of-year payments of $5.6 million.

If she thinks she can earn 7% percent annually, which should she choose?
-Select-She should accept the 30-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest present valueShe should accept the 10-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest future valueItem 1

If she expects to earn 8% annually, which is the best choice?
-Select-She should accept the lump-sum payment option as it carries the highest present valueShe should accept the 30-year payment option as it carries the highest present valueShe should accept the 10-year payment option as it carries the highest present valueShe should accept the lump-sum payment option as it carries the highest future valueItem 2

If she expects to earn 9% annually, which option would you recommend?
-Select-She should accept the lump-sum payment option as it produces the highest present valueShe should accept the 30-year payment option as it produces the highest present value.She should accept the 10-year payment option as it produces the highest present valueShe should accept the 30-year payment option as it produces the highest future valueItem 3

Explain how interest rates influence her choice.

Solution

Present Value of lump sum today = 64 milliion

b. for 10 year payments

FV = 0, N = 10, PMT = 9.7, rate = 7%

use PV function in Excel

Present value = 68.13

c. for 30 year payments

FV = 0, N = 30, PMT = 5.6, rate = 7%

present value = 69.49

so accept the 30 year payments each year