Your Uncle Otto Has Struck It Rich by Investing in Racehorses

question 9

Essay

Your Uncle Otto has struck it rich by investing in racehorses and desires to share some of his newfound wealth with you. Assume that you must choose from among the following three options:
Receive a lump sum of $400,000 in 20 years.
Receive $20,000 at the end of each year for the next 10 years.
Receive $90,000 now.
A. Why is it inappropriate to compare $400,000 (no. 1) vs. $200,000 (no. 2) vs. $90,000 (no. 3) and conclude that no. 1 is the best option? Explain.
B. What should you do to determine which option is the best? What does this process do?
C. If Uncle Otto agreed to revise option no. 1 so that you could receive $200,000 in 10 years and the remaining $200,000 in another 10 years, would you likely prefer the revision or the option as originally stated? Why?
D. What is an annuity? Do any of the options involve an annuity?

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Definitions:

Semantics

The study of meaning in language, including the analysis of the meanings of words, phrases, sentences, and texts.

William Stern

A psychologist known for his work in intelligence testing and the development of the intelligence quotient (IQ) measurement.

Twin Study

A research method used to study the genetic and environmental influences on traits by comparing the similarity between monozygotic (identical) and dizygotic (fraternal) twins.

Sternberg's Theory

This is Robert Sternberg's Triarchic Theory of Intelligence that suggests intelligence is comprised of three parts: analytical, creative, and practical intelligence.