Value of an annuity versus a single amount

Assignment Help Financial Management

Reference no: EM131499675

Personal Finance Problem

Assume that you just won the state lottery. Your prize can be taken either in the form of ?$52,000 at the end of each of the next 30 years? (that is, ?$1 560,000 over 30?years) or as a single amount of ?$867,000 paid immediately.

a. If you expect to be able to earn 8?% annually on your investments over the next 30 ?years, ignoring taxes and other? considerations, which alternative should you? take? Why?

b. Would your decision in part a change if you could earn 10?% rather than 8?% on your investments over the next 30 ?years? Why?

c. On a strictly economic? basis, at approximately what earnings rate would you be indifferent between the two? plans?

a. To decide which alternative to? take, you need to compare the values of these alternatives. Although the total nominal dollar amount of the annuity is much larger than the single? payment, the former is not necessarily a better choice due to the different timing of cash flows. A way to make a meaningful comparison of the two alternatives is to compare their present values.

If you take the prize as an? annuity, the present value of the 30?-year ordinary annuity is ?$585405

If you take the prize as a single? amount, the present value of the lump sum is ?$802780

Which alternative should be? chosen? ?(Select the best answer? below.)

Annual payments?, because the present value is greater. Lump sum ?, because the present value is greater.Your answer is correct.

b. If you earned 10?% rather than 8?% on your? investments, the present value of the 30?-year ordinary annuity is ?$490200 Which alternative should be? chosen? ?(Select the best answer? below.) Lump sum ?because the present value is greater.Your answer is correct.

Annual payments?, because the present value is greater.

c. On a strictly economic? basis, the rate at which you would be indifferent between the two plans is $________?%. ?(Round to two decimal? places.)

Enter your answer in the answer box and then click Check Answer.

Reference no: EM131499675

Questions Cloud

Are statements consistent with an organic view of government : "A strong state for Russians is not an anomaly, not something that must be fought against, but on the contrary is the initiator and main driving force.

Should the clinic agree to arrangement : A health maintenance organization offers to send 500 patients per year but only offers to pay $300 for each one. Should the clinic agree to this arrangement?

Riverrocks to use to evaluate the? acquisition : What is the appropriate discount rate for RiverRocks to use to evaluate the? acquisition? Why?

Calculate amount of interest paid over the duration of loan : Calculate the amount of interest paid over the duration of the loan.

Value of an annuity versus a single amount : Assume that you just won the state lottery. Your prize can be taken either in the form of ?$52,000 at the end of each of the next 30 years?

Should the project be accepted or rejected-accepted rejected : Compute the PI statistic for Project Q if the appropriate cost of capital is 12 percent. Should the project be accepted or rejected? Accepted Rejected

What was the cash flow to creditors : What was the operating cash flow for 2014? If no new debt was issued during the year, what was the cash flow to creditors?

How many additional months are required to pay off the loan : If it continues the $2276.0 payments, how many additional months are required to pay off the loan?

Foreign currency-hypothetical facts : In translating the yen into U.S. dollars in 2015, will RadioShack experience a translation gain or loss? What is the amount of the gain or loss?

User Account

All Pages