Jared Electronics Company wins the state award and has the following three payout options for after-tax prize money: 1.$150,000 per year at the end of each of the next six years
2.$300,000 (lump sum)now
3.$500,000 (lump sum)six years from now
The required rate of return is 9%.What is the present value if the first option is selected? (Round your answer to the nearest whole dollar.)
Present value of annuity of $1:
Present value of $1:

Question

Jared Electronics Company wins the state award and has the following three payout options for after-tax prize money: 1.$150,000 per year at the end of each of the next six years
2.$300,000 (lump sum)now
3.$500,000 (lump sum)six years from now
The required rate of return is 9%.What is the present value if the first option is selected? (Round your answer to the nearest whole dollar.)
Present value of annuity of $1:
 Present value of $1:

Quizplus · Accepted Answer

To calculate the present value of option 1, we can use the formula for the present value of an annuity:
PV = C x [(1 - (1 / (1+r)^n)) / r]
Where C is the annual payment, r is the required rate of return, and n is the number of periods.

In this case, C = $150,000, r = 9%, and n = 6. Plugging these values into the formula, we get:
PV = $150,000 x [(1 - (1 / 1.09^6)) / 0.09] = $672,900

Therefore, the present value of option 1 is $672,900. As this is the highest value among the three options, it is the best choice. Option 2 ($300,000 lump sum now) has a present value of $300,000, which is lower than option 1. Option 3 ($500,000 lump sum six years from now) is also not as good as option 1, since we need to discount it back to the present using the required rate of return. The present value of option 3 is:
PV = $500,000 / (1.09^6) = $302,696
Therefore, the best choice is option 1.

Jared Electronics Company Wins the State Award and Has the Following