Reference no: EM131862826
The subject you are studying this week, Time Value of Money, is one of the most important concepts in finance. The reason it is so important is because the ultimate objective of financial managers is to maximize the value of the firms they work for. So this concept of value (value today, value in the future, measuring value, changing value) assumes ultimate importance.Here is a problem that illustrates one use of value in decision making. Once you are reasonably familiar with this week's material, try your hand at it. I was going to use the current $535 million jackpot but decided to go with a more reasonable example.
The issue:
Suppose it was announced this morning that a family member of yours was the winner of a Powerball lottery Grand Prize of $73.7 million.
Unfortunately, they can't actually collect $73.7 million in cash today. Instead, they are offered two options:
- Collect the prize in 25 annual payments of $2.948 million each (before-tax), or
- Take a one-time lump sum payment of $41.4 million (before-tax) now.
Since you are an esteemed financial planner (due to your work in this term's BUSN 5200 on-line course) they have approached you for advice. Your family member wants to know, should he or she take the 25 payments of $2.948 million each, or should he or she take the $41.4 million lump sum payment?
What would you advise your family member to do, and why? Remember, the quality of your answer determines the size of your fat financial planner commission check.
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