John wins the lottery 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 he selects the first option? Round to nearest whole dollar.
Present value of annuity of $1: Present value of $1:

Question

John wins the lottery 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 he selects the first option? Round to nearest whole dollar.
Present value of annuity of $1:  Present value of $1:

Quizplus · Accepted Answer

To find the present value of the first option, we need to use the present value of an annuity formula.

PV = $150,000 x [(1 - (1/1.09^6)) / 0.09]

PV = $672,900 (rounded to nearest whole dollar)

Now, we need to compare the present value of all three options:

Option 1: $672,900
Option 2: $300,000
Option 3: $500,000 / (1.09^6) = $304,767

As we can see, option 1 has the highest present value, so it is the best choice. Option 2 is not as good because its present value is lower than option 1, and option 3 is even worse because we have to wait six years to receive the lump sum, and its present value is also lower than option 1.

John Wins the Lottery and Has the Following Three Payout