Question: After hearing a knock at your front door you are

After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large, well-known magazine subscription company. It has arrived with the good news that you are the big winner, having won $20 million. You have three options:
(a) Receive $1 million per year for the next 20 years.
(b) Have $8 million today.
(c) Have $2 million today and receive $700,000 for each of the next 20 years.
Your financial adviser tells you that it is reasonable to expect to earn 12 percent on investments.

1. Calculate the present value of each option.
2. Determine which option you prefer and explain your reasoning.

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  • CreatedFebruary 27, 2015
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