Jacob NcFadden was living a simple farmers life in a rural neighbourhood outside Birmingham, Alabama, until he hit the big Beaucoup Millions drawing right before Christmas! In fact, he hadnt realized that he had won until his daughter called him from Phoenix, Arizona, that the lottery ticket they had just bought while she was visiting her parents and she had held on to the receipt in her purse then had the big prize winning combination! Now, Jacob was in total disbelief when Jeremy, an employee of Beaucoup Millions, called him to give him the choice of his life to make. Jeremy had explained to Jacob that he could cash the $10,000,000 prize that he had just won in one of following three ways: Get a lump sum next Monday of $3,357,055 in his bank account; Get $500,000 at the end each of the next 20 years; Get $30,000 at the end of each month for as long as he lived (he was 49 years old at this time), AND that his heirs (and their subsequent heirs) would receive that $30,000 per month forever! Poor Jacob was perplexed now. He knew he had his neighbor Samantha, who worked for FinTech Advisors as a financial advisor (and accordingly had access to a financial calculator OR Excel at home). So, he went to visit on Samantha and get her financial advice on this bizarre choice to make.

 Given that the going market discount rate is 12% per year, which of the 3 options above, (A), (B), or (C) should Samantha suggest for Jacob to choose? Why so? Show calculations for your reasoning. Whats the concept involved in (B) above, and which Chapter in the textbook speaks about this concept? Whats the concept involved in (C) above, and which Chapter in the textbook speaks about this concept?

Answer rating: 100% (QA)

Samantha should suggest that Jacob choose option A which is to receive a lump sum of 3357055 next Mo... View the full answer