P3-20. Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next twenty-five years (i.e., $1 million over twenty-five years) or as a lump sum of $500,000 paid immediately. If you expect to be able to earn 5% annually on your investments over the next twenty-five a. years, which alternative should you take? Why? Would your decision in part (a) be altered if you could earn 7% rather than 5% on your invest- ments over the next twenty-five years? Why?
P3-20. Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next twenty-five years (i.e., $1 million over twenty-five years) or as a lump sum of $500,000 paid immediately. If you expect to be able to earn 5% annually on your investments over the next twenty-five a. years, which alternative should you take? Why? Would your decision in part (a) be altered if you could earn 7% rather than 5% on your invest- ments over the next twenty-five years? Why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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P3-20 a. and b.
Transcribed Image Text:P3-20. Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at
the end of each of the next twenty-five years (i.e., $1 million over twenty-five years) or as a lump sum
of $500,000 paid immediately.
If you expect to be able to earn 5% annually on your investments over the next twenty-five
a.
years, which alternative should you take? Why?
Would your decision in part (a) be altered if you could earn 7% rather than 5% on your invest-
ments over the next twenty-five years? Why?
Expert Solution
Step 1
A concept that implies the future worth of the money is lower than its current value due to several factors such as inflation, and many more is term as the TVM (time value of money).
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