Brian won the state lottery grand prize of $5 million. The lottery offers him two options: five annual payments of $1 million, starting this year, or one lump sum payment of $4.5 million right away. (a) If the interest rate (discount rate) is i = 5%, what is the present value of the prize if Brian choose the five annual payments? Which option should he choose? (b) If the interest rate (discount rate) is i = 10%, what is the present value of the prize if Brian choose the five annual payments? Which option should he choose?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

3) Brian won the state lottery grand prize of $5 million. The lottery offers him two options: five annual payments of $1 million, starting this year, or one lump sum payment of $4.5 million right away.

(a) If the interest rate (discount rate) is i = 5%, what is the present value of the prize if Brian choose the five annual payments? Which option should he choose?

(b) If the interest rate (discount rate) is i = 10%, what is the present value of the prize if Brian choose the five annual payments? Which option should he choose?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 2 images

Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education