### Computation of npv of lump sum future receipt

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Computation of NPV of lump sum future receipt and annuity receipts.

1. Kimberly has just won a \$20 million lottery, which will pay her \$1 million at the end of each year for 20 years. An investor has offered her \$10 million for this annuity. She estimates that she can earn 10 percent interest, compounded annually, on any amounts she invests. She asks your advice on whether to accept or reject the offer. What will you tell her? (Ignore Taxes)

2. Mr. Handyman has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump? Sum of \$5,000 today, or an annuity of \$1,250 a year for the next five years. Which option should Mr. Handyman choose if his opportunity cost is 9 percent?

3. In their meeting with their advisor, Mr. & Mrs. Smith concluded that they would need \$40,000 per year during their retirement years in order to live comfortably. They will retire 10 years from now and expect a 20? Year retirement period. How much should Mr. & Mrs. Smith deposit now in a bank account paying 9 percent to reach financial happiness during retirement?

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