Present value computation kerry bales won the state lottery and was given four choices for receiving her winnings. receive $400,000 right now. receive $432,000 in one year. receive $40,000 at the end of each year for 20 years. receive $36,000 at the end of each year for 30 years. assuming kerry can earn interest of 8% compounded annually, which option should kerry choose?

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Business

Finnegan

20 May, 20:25

Present value computation kerry bales won the state lottery and was given four choices for receiving her winnings. receive $400,000 right now. receive $432,000 in one year. receive $40,000 at the end of each year for 20 years. receive $36,000 at the end of each year for 30 years. assuming kerry can earn interest of 8% compounded annually, which option should kerry choose?

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Brennan Nelson · Answer 1

Option 1: PV = $400,000

Option 2: Receive (FV) $432,000 in one year

PV = FV (1 / (1+i) ^n), where i = 8% = 0.08, n = 1 year

PV = 432,000 (1 / (1+0.08) ^1) = $400,000

Option 3: Receive (A) $40,000 each year fro 20 years

PV = A{[1 - (1+i) ^-n]/i} where, n = 20 years

PV = 40,000{[1 - (1+0.08) ^-20]/0.08} = $392,725.90

Option 4: Receive (A) $36,000 each year from 30 years

PV = 36,000{[1 - (1+0.08) ^-30]/0.08} = $405,280.20

On the basis of present value computations above, option 4 is the best option for Kerry Blales. This option has the highest present value of $405,280.20