Simone just won the lottery and must choose between three award options:

$1.$ A lump sum of $$10,000,000$ received today

$2.15$ end$-$of$-$year payments of $$1,250,000$

$3.40$ end$-$of$-$year payments of $$900,000$

For each option in the table, indicate which values to enter for each variable in your financial calculator.

Option $1$

Option $2$

Option $3$

Lump Sum Payment

$15$ Payments

$40$ Payments

No$.$ of Periods $==$

Annual payment $==$

Future Value FV$=0$ FV $=0$

Present Value $$10,000,000??$

Assume the interest rate is $8\mathrm{.}00\%,$ entered as $8$ on your financial calculator.

Note: Take the absolute value of the present value when answering this question.

Using the table you just filled out, along with a financial calculator, yields a present value for option $2$ of approximately and a present value for option $3$ of approximately $($when the interest rate is $8\mathrm{.}00\%).$ Based on this, Simone should choose option$2$ if she seeks to maximize present value.

Now assume the interest rate is $9\mathrm{.}00\%,$ entered as $9$ on your financial calculator.

Note: Take the absolute value of the present value when answering this question.

Using the table you just filled out, along with your financial calculator, yields a present value for option $2$ of approximately and a present value for option $3$ of approximately $($when the interest rate is $9\mathrm{.}00\%).$ Based on this, Simone should choose option if she seeks to maximize present value.

Assume the interest rate is $10\mathrm{.}00\%,$ entered as $10$ on your financial calculator.

Note: Take the absolute value of the present value when answering this question.

Using the table you just filled out, along with your financial calculator, yields a present value for option $2$ of approximately and a present value for option $3$ of approximately $($when the interest rate is $10\mathrm{.}00\%).$ Based on this, Simone should choose option if she seeks to maximize present value.

As the interest rate increases, option $1$ becomes attractive.

Step $3$: Practice: Evaluating Lump Sums and Annuities

Now it$$s time for you to practice what you$$ve learned.

Suppose that Simone just won the lottery and must choose between three award options:

$1.$ A lump sum of $$40,000,000$ received today

$2.15$ end$-$of$-$year payments of $$5,000,000$

$3.40$ end$-$of$-$year payments of $$3,600,000$

Assume the interest rate is $8\mathrm{.}00\%,$ entered as $8$ on your financial calculator.

Note: Take the absolute value of the present value when answering this question.

Using a financial calculator yields a present value for option $2$ of approximately and a present value for option $3$ of approximately $($when the interest rate is $8\mathrm{.}00\%).$ Based on this, Simone should choose option if she seeks to maximize present value.

Now assume the interest rate is $9\mathrm{.}00\%,$ entered as $9$ on your financial calculator.

Note: Take the absolute value of the present value when answering this question.

Using the table you just filled out and a financial calculator, yields a present value for option $2$ of approximately and a present value for option $3$ of approximately $($when the interest rate is $9\mathrm{.}00\%).$ Based on this, Simone should choose option if she seeks to maximize present value.

Assume the interest rate is $10\mathrm{.}00\%,$ entered as $10$ on your financial calculator.

Note: Take the absolute value of the present value when answering this question.

Using the table you just filled out and a financial calculator, yields a present value for option $2$ of approximately and a present value for option $3$ of approximately $($when the interest rate is $10\mathrm{.}00\%).$ Based on this, Simone should choose option if she seeks to maximize present value.

As the interest rate increases, options $2$ and $3$ become attractive, relative to option $1.$

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