Time value and discount rates Personal Finance Problem You just won a lottery that promises to...

Transcribed Image Text:

Time value and discount rates Personal Finance Problem You just won a lottery that promises to pay you $1,200,000 exactly 15 years from today. A company approaches you today, offering cash in exchange for your winning lottery ticket. a. What would you sell your claim for if you can earn the following rates of return on similar-risk investments during the 15-year period? Do the values you calculated represent the lowest price you'd be willing to accept or the highest acceptable price? (1) 7% (2) 11% (3) 15% b. Rework part a under the assumption that the $1,200,000 payment will be received in 25 rather than 15 years. c. On the basis of your findings in parts a and b, discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum. i Click the icon to see the Worked Solution (Formula Solution). Click the icon to see the Worked Solution (Financial Calculator Solution). Click the icon to see the Worked Solution (Spreadsheet Solution). a. (1) The least you will sell your claim for if you can earn a rate of return of 7% during the 15-year period is $ (Round to the nearest cent.) Time value and discount rates Personal Finance Problem You just won a lottery that promises to pay you $1,200,000 exactly 15 years from today. A company approaches you today, offering cash in exchange for your winning lottery ticket. a. What would you sell your claim for if you can earn the following rates of return on similar-risk investments during the 15-year period? Do the values you calculated represent the lowest price you'd be willing to accept or the highest acceptable price? (1) 7% (2) 11% (3) 15% b. Rework part a under the assumption that the $1,200,000 payment will be received in 25 rather than 15 years. c. On the basis of your findings in parts a and b, discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum. i Click the icon to see the Worked Solution (Formula Solution). Click the icon to see the Worked Solution (Financial Calculator Solution). Click the icon to see the Worked Solution (Spreadsheet Solution). a. (1) The least you will sell your claim for if you can earn a rate of return of 7% during the 15-year period is $ (Round to the nearest cent.)