Suppose You Win a Small Lottery and You Are Given

question 31

Multiple Choice

Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $10,000 or (2) two annual payments,each in the amount of $5,200,with the first payment coming one year from now,and the second payment coming two years from now.You would choose to take the immediate payment of $10,000 if the interest rate is

• A)2 percent,but not if the interest rate is 1 percent.
• B)3 percent,but not if the interest rate is 2 percent.
• C)4 percent,but not if the interest rate is 3 percent.
• D)5 percent,but not if the interest rate is 4 percent.

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Definitions:

Annual Amortization

The systematic reduction of the cost (or other basis) of an intangible asset over a specified time period.

Retained Earnings

The portion of net income left over for the business after it has paid out dividends to its shareholders.

Initial Value Method

A method of accounting in which an investment is initially recorded at its cost without adjusting for changes in the market value over time.

Net Income

The conclusive profit of a corporation once revenue has had taxes and expenses subtracted from it.