John Wins the Lottery and Has the Following Three Payout

question 42

Multiple Choice

John wins the lottery and has the following three payout options for after-tax prize money:
1) $50,000 per year at the end of each of the next six years
2) $300,000 (lump sum) now
3) $500,000 (lump sum) six years from now
The required rate of return is 9%. What is the present value if he selects the third option? Round to nearest whole dollar.
Present value of $1:
$$\begin{array} { | r | r | r | r | } \hline & 8 \% & 9 \% & 10 \% \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.681 & 0.65 & 0.621 \\\hline 6 & 0.63 & 0.596 & 0.564 \\\hline 7 & 0.583 & 0.547 & 0.513 \\\hline\end{array}$$

• A) $250,000
• B) $230,000
• C) $238,400
• D) $298,000

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Definitions:

Lubricants

Oils, greases, and other substances used to reduce friction between mechanical parts.

Supplies

Items and materials used in the daily operations of a business, often consumable and regularly replaced.

Material Price Variance

The difference between the actual cost of materials and the expected (or standard) cost.

Labor Rate Variance

The difference between the actual cost of labor and the expected (or budgeted) cost, based on predetermined rates and actual hours worked.