You just won the lottery and are given two options

i. Option 1 – pays out $100,000 today.

ii. Option 2 pays out $20,000 a year for 6 years (starting at the end of the year). 

a. Consider the cash flow of Option 1 - Option 2 (i.e., the difference between the two cash flows). Compute the NPV of this differenced cash flows. Assume the discount rate is 6%. 

b. Based on your analysis in Part A, which investment do you prefer? Why?

c. Create a data table that reports the NPV of (Option 1 – Option 2) as the discount rate varies from 0% to 15% (in increments of 1%). 

d. Plot the graph of the data table. Title the chart “NPV of (Option1 - Option 2) for interest rates ranging from 0% to 15%” and make the chart title dynamic so that the 0% and 15% change if the corresponding values in the data table also change. Make sure the percentages are formatted as % with no decimal points

Answer rating: 100% (QA)

To compute the net present value NPV of the cash flow difference between Option 1 and Option 2 we first need to calculate the present value PV of each ... View the full answer