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.

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?

  • CreatedDecember 15, 2014
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