Question

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.

Required:
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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