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John Doe Wins the Lottery and May Pick from the Following

Question 62

Multiple Choice

John Doe wins the lottery and may pick from the following three choices:
Take $750,000 now.
Take $1,000,000 ten years from now.
Take $90,000 at the end of this year, and at the end of each following year for ten installments in total.
Assume that John Doe uses a discount rate of 5% to evaluate his choices. If he selects the second option, how much is the present value of that alternative?
 Present  Value of $1 5%6%7%8%9%10%10.9520.9430.9350.9260.9170.90920.9070.8900.8730.8570.8420.82630.8640.8400.8160.7940.7720.75140.8230.7920.7630.7350.7080.68350.7840.7470.7130.6810.6500.62160.7460.7050.6660.6300.5960.56470.7110.6650.6230.5830.5470.51380.6770.6270.5820.5400.5020.46790.6450.5920.5440.5000.4600.424100.6140.5580.5080.4630.4220.386\begin{array} { | r | r | r | r | r | r | r | } \hline\begin{array} { l } \text { Present } \\\text { Value of } \\\text {\$1 }\end{array} & & & & & & \\\hline& 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\\\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.823 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\\hline 6 & 0.746 & 0.705 & 0.666 & 0.630 & 0.596 & 0.564 \\\hline 7 & 0.711 & 0.665 & 0.623 & 0.583 & 0.547 & 0.513 \\\hline 8 & 0.677 & 0.627 & 0.582 & 0.540 & 0.502 & 0.467 \\\hline 9 & 0.645 & 0.592 & 0.544 & 0.500 & 0.460 & 0.424 \\\hline 10 & 0.614 & 0.558 & 0.508 & 0.463 & 0.422 & 0.386 \\\hline\end{array}


A) $614,000
B) $1,000,000
C) $750,000
D) $798,000

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