# Question: Suppose the market rate of interest is 10 percent and

Suppose the market rate of interest is 10 percent and you have just won a $ 1 million lottery that entitles you to $ 100,000 at the end of each of the next 10 years.

Required:

a. What is the minimum lump- sum cash payment you would be willing to take now in lieu of the 10- year annuity?

b. What is the minimum lump sum you would be willing to accept at the end of the 10 years in lieu of the annuity?

c. Suppose three years have passed; you have just received the third payment and you have seven left when the lottery promoters approach you with an offer to settle up for cash. What is the minimum you would accept at the end of year 3?

d. How would your answer to (a) change if the first payment came immediately ( at t = 0) and the remaining payments were at the beginning instead of the end of each year?

Required:

a. What is the minimum lump- sum cash payment you would be willing to take now in lieu of the 10- year annuity?

b. What is the minimum lump sum you would be willing to accept at the end of the 10 years in lieu of the annuity?

c. Suppose three years have passed; you have just received the third payment and you have seven left when the lottery promoters approach you with an offer to settle up for cash. What is the minimum you would accept at the end of year 3?

d. How would your answer to (a) change if the first payment came immediately ( at t = 0) and the remaining payments were at the beginning instead of the end of each year?

**View Solution:**## Answer to relevant Questions

Mr. Jones intends to retire in 20 years at the age of 65. As yet he has not provided for retirement income, and he wants to set up a periodic savings plan to do this. If he makes equal annual payments into a savings account ...Declining Market, Inc., is considering the problem of when to stop production of a particular product in its product line. Sales of the product in question have been declining and all estimates are that they will continue to ...Geico is considering expanding an existing plant on a piece of land it already owns. The land was purchased 15 years ago for $ 325,000 and its current market appraisal is $ 820,000. A capital budgeting analysis shows that ...Declining Market, Inc., is considering the problem of when to stop production of a particular product in its product line. Sales of the product in question have been declining and all estimates are that they will continue to ...A textbook on organization theory says: Drawing upon the writings of Maslow, McGregor presented his Theory X– Theory Y dichotomy to describe two differing conceptions of human behavior. Theory X assumptions held that ...Post your question