Financial And Managerial Accounting
15th Edition
ISBN: 9781337902663
Author: WARREN, Carl S.
Publisher: Cengage Learning,
expand_more
expand_more
format_list_bulleted
Question
Chapter 11, Problem 4TIF
To determine
Identify the payout option that Person A would select.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Alex Kelton recently won the jackpot in the Colorado lottery while he was visiting his parents. When he arrived at the lottery office to collect his winnings, he was offered the following three payout options:a. Receive $100,000,000 in cash today.b. Receive $25,000,000 today and $9,000,000 per year for eight years, with the first payment being received one year from today.c. Receive $15,000,000 per year for 10 years, with the first payment being received one year from today.Assuming that the effective rate of interest is 7%, which payout option should Alex select? Use the present value tables in Appendix A. Explain your answer and provide any necessary supporting calculations.
Alex Kelton recently won the jackpot in the Colorado lottery while he was visiting his parents. When he arrived at the lottery office to collect his winnings, he was offered the following three payout options:
Receive $100,000,000 in cash today.
Receive $25,000,000 today and $9,000,000 per year for eight years, with the first payment being received one year from today.
Receive $15,000,000 per year for 10 years, with the first payment being received one year from today.
Assuming that the effective rate of interest is 7%, which payout option should Alex select?
Dmitri just won the lottery and must choose between three award options:
1. A lump sum of $20,000,000 received today
2. 15 end-of-year payments of $2,500,000
3. 40 end-of-year payments of $1,800,000
For each option in the table, indicate which values to enter for each variable in your financial calculator.
Option 1
Option 2
Option 3
Lump Sum Payment
15 Payments
40 Payments
No. of Periods
I/YR V
= 15 ▼
I/YR V
= 40
Annual payment
%3D
%3D
Future Value
FV= 0
FV = 0
Present Value
$20,000,000
Assume the interest rate is 8.00%, entered as 8 on your financial calculator.
Note: Take the absolute value of the present value when answering this question.
Using the table you just filled out, along with a financial calculator, yields a present value for option 2 of approximately
and a
present value for option 3 of approximately
(when the interest rate is 8.00%). Based on this, Dmitri should choose option
if he seeks to maximize present value.
Chapter 11 Solutions
Financial And Managerial Accounting
Ch. 11 - Describe the two distinct obligations incurred by...Ch. 11 - Explain the meaning of each of the following terms...Ch. 11 - If you asked your broker to purchase for you a 12%...Ch. 11 - Prob. 4DQCh. 11 - Prob. 5DQCh. 11 - Prob. 6DQCh. 11 - Prob. 7DQCh. 11 - Fleeson Company needs additional funds to purchase...Ch. 11 - Prob. 9DQCh. 11 - Issuing bonds at face amount On January 1, the...
Ch. 11 - Issuing bonds at a discount On the first day of...Ch. 11 - Prob. 3BECh. 11 - Prob. 4BECh. 11 - Prob. 5BECh. 11 - Prob. 6BECh. 11 - Times interest earned Averill Products Inc....Ch. 11 - Prob. 1ECh. 11 - Entries for issuing bonds Thomson Co. produces and...Ch. 11 - Prob. 3ECh. 11 - Prob. 4ECh. 11 - Prob. 5ECh. 11 - Entries for issuing and calling bonds; gain Mia...Ch. 11 - Prob. 7ECh. 11 - Present value of amounts due Assume that you are...Ch. 11 - Prob. 9ECh. 11 - Present value of an annuity On January 1, you win...Ch. 11 - Prob. 11ECh. 11 - Prob. 12ECh. 11 - Prob. 13ECh. 11 - Prob. 14ECh. 11 - Appendix 2 Amortize premium by interest method...Ch. 11 - Prob. 16ECh. 11 - Prob. 17ECh. 11 - Bond discount, entries for bonds payable...Ch. 11 - Prob. 2PACh. 11 - Entries for bonds payable, including bond...Ch. 11 - Appendix 1 and Appendix 2 Bond discount, entries...Ch. 11 - Prob. 5PACh. 11 - Bond discount, entries for bonds payable...Ch. 11 - Prob. 2PBCh. 11 - Entries for bonds payable, including bond...Ch. 11 - Prob. 4PBCh. 11 - Prob. 5PBCh. 11 - Analyze and compare Amazon.com and Wal-Mart...Ch. 11 - Analyze and compare Clorox and Procter Gamble The...Ch. 11 - Prob. 3MADCh. 11 - Analyze and compare Hilton and Marriott Hilton...Ch. 11 - Prob. 1TIFCh. 11 - Prob. 3TIFCh. 11 - Prob. 4TIF
Knowledge Booster
Similar questions
- Lottery Your dreams of becoming rich have just come true. You have won the State of Tranquility's Lottery. The State offers you two payment plans for the $1.000,000 advertised jackpot. You can take annual payments of $20,000 at the end of the year for the next 50 years or $166,090 today. a. If your investment rate over the next 50 years is 14%, which payoff will you choose? b. If your investment rate over the next 50 years is 10%, which payoff will you choose? c. At what investment rate will the annuity stream of $20.000 be the same as the lump-sum payment of $166.090? a. If your investment rate over the next 50 years is 14%, what is the present value of the $20,000 annual payments today? (Round to the nearest dollar.)arrow_forwardA lottery winner will receive $1 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.1% per year? A. $19.09 million B. $30.54 million C. $26.73 million D. $15.27 millionarrow_forwardJane Bauer has won the lottery and has the following four options for receiving her winnings: Receive $100,000 at the beginning of the current year Receive $108,000 at the end of the year Receive $20,000 at the end of each year for eight years Receive $10,000 at the end of each year for 30 years Jane can invest her winnings at an interest rate of 8% compounded annually at a major bank. Use the appropriate present or future value table: FV of $1, PV of $1, FV of Annuity of $1 and PV of Annuity of $1 Calculate the Present value for each of the above options. Round all answers to the nearest dollar. Present Value Option 1 $fill in the blank 1 Option 2 $fill in the blank 2 Option 3 $fill in the blank 3 Option 4 $fill in the blank 4 Which of the payment options should Jane choose?arrow_forward
- On a whim you purchased a scratch−off lottery ticket at the gas station. It must have been your lucky day because you won $3,000,000. Being logical and rational you decide to invest the money at 5% for 14 years until you are ready to start a family. At the end of 14 years, how much will your investment be worth? -the future value of $1 table -the future value of annuity of $1 tablearrow_forwardBasic Present Value Concepts The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state’s newest millionaire. By choosing the six winning numbers on last week’s state lottery, Mr. Ormsby won the week’s grand prize totaling $1.6 million. The Slate Lottery Commission indicated that Mr. Ormsby will receive his prize in 20 annual installments of $80,000 each. Required: 1. If Mr. Ormsby can invest money at a 12% rate of return, what is the present value of his winnings? 2. Is it correct to say that Mr. Ormsby is the “state’s newest millionaire”? Explain your answer.arrow_forwardPLEASE ANSWER ALL THREE QUESTIONS A $2.4 million state lottery pays $10,000 at the beginning of each month for 20 years. How much money must the state actually have in hand to set up the payments for this prize if money is worth 8.7%, compounded monthly? As the contestant with the longest winning streak in the history of Jeopardy, Ken Jennings won more than $2.5 million. Suppose he invested $1.6 million in an ordinary annuity that earned 4.8%, compounded monthly. How much would he receive at the end of each month for the next 15 years? A man buys a house for $340,000. He makes a $150,000 down payment and amortizes the rest of the purchase price with semiannual payments over the next 7 years. The interest rate on the debt is 11%, compounded semiannually. Find the total amount paid for the purchase onlyarrow_forward
- solve parts C and D a) Barney Rubble expects to retire in 10 years and would like to accumulate £100,000 in his pension fund. If the annual interest rate is 6% (Annual Percentage Rate), how much should Barney put into his pension fund each month in order to achieve his goal? (Assume that Barney will deposit the same amount each month.) b) As winner of a lottery, you can choose one of the following prizes: (i) £100,000 now (ii) £180,000 at the end of 5 years (iii) £12,000 every year forever If the interest rate is 12%, which prize is the most valuable? c)You decide to pay on your bank account £1,000 every year for the next 10 years, starting today (total of 10 annual payments of £1,000). Five years after the last payment, you decide to withdraw £1,000 every year for 10 years. If the annual interest rate is 5%, how much money do you have left on your bank account right after the last withdrawal? c) You decide to pay on your bank account £1,000 every year for the next…arrow_forwardes You have just received notification that you have won the $2 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 63 years from now. What is the present value of your windfall if the appropriate discount rate is 8 percent? Multiple Choice $14,425.18 $15,679.54 $15.993.13 $15,365.95 $40,135.54arrow_forwardCongratulation Nolan! He won Powerball lottery early this morning. He will go with a lottery annuity, instead of a lump-sum payment. In this case, Nolan is to receive a 37-year, $1.44 million annually, with the first payment to be received tonight. At a 6.41% discount rate, this lottery worth today is closest to A. $20.23 million. B. $21.51 million. C. $23.85 million. D. $25.54 million.arrow_forward
- Joan Lucky won the $44,000,000 lottery. She is to receive $1.3 million a year for the next 25 years plus an additional lum payment of $11.5 million after 25 years. The discount rate is 18 percent. What is the current value of her winnings? (Use a Financial calculator to arrive at the answer. Round the final answer nearest whole dollar.) Current Value $arrow_forwardAfter hearing a knock at your front door, you are surprised to see the Prize Patrol from your state's online lottery agency. Upon opening your door, you learn you have won the lottery of $12.5 million. You discover that you have three options: (1) you can receive $1.25 million per year for the next 10 years, (2) you can have $10 million today, or (3) you can have $4 million today and receive $1 million for each of the next eight years. Your lawyer tells you that it is reasonable to expect to earn an annual return of 10 percent on investments. Required: 1. What is the present value of the above options? (FV of $1, PV of $1, FVA of $1, and PVA of $1) Note: Use appropriate factor(s) from the tables provided. 2. Which option do you prefer? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 2 above options? What is the present Note: Enter your answers in whole dollar not in millions (i.e., 1,000,000 not 1.0), rounded to nearest whole dollar.…arrow_forwardSuppose that Dmitri just won the lottery and must choose between three award options: 1. A lump sum of $40,000,000 received today 2. 15 end-of-year payments of $5,000,000 3. 40 end-of-year payments of $3,600,000 Assume the interest rate is 8.00%, entered as 8 on your financial calculator. Note: Take the absolute value of the present value when answering this question. Using a financial calculator yields a present value for option 2 of approximately and a present value for option 3 of approximately (when the interest rate is 8.00%). Based on this, Dmitri should choose option if he seeks to maximize present value. Now assume the interest rate is 9.00%, entered as 9 on your financial calculator. Note: Take the absolute value of the present value when answering this question. Using the table you just filled out and a financial calculator, yields a present value for option 2 of approximately and a present value for option 3 of approximately v (when the interest rate is 9.00%). Based on…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
Financial Accounting: The Impact on Decision Make...
Accounting
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Cengage Learning