Your Plans for the Future Have Finally Materialized Because You

question 67

Essay

Your plans for the future have finally materialized because you have won the lottery.Congratulations! The lottery marketing material says you have won $20,000,000 but a more careful examination of the terms and conditions means that you have won twenty $1,000,000 beginning-of-the-year cash flows with the first cash flow today.Further,the lottery contract says that instead of waiting for so many years to collect your winnings,you could accept a lump sum check today in the amount of $12,000,000.If you determine that the appropriate interest rate to compare these two alternatives is 6%,which alternative is preferred? To answer this question,solve for the present value of each alternative and make your decision based strictly on the values.You may ignore taxes in your decision

---

Definitions:

Substitutes

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

Elastic Demand

A situation in which the demand for a good or service is sensitive to price changes, meaning a small change in price leads to a significant change in the quantity demanded.

Total Revenue

The total amount of money a company receives from sales of its products or services, calculated by multiplying the price per unit by the number of units sold.

Delicatessen

A retail establishment that sells a selection of fine, unusual, or foreign prepared foods.