John Wins the Lottery and Has the Following Three Payout

question 41

Multiple Choice

John wins the lottery and has the following three payout options for after-tax prize money:
1) $162,000 per year at the end of each of the next six years
2) $308,000 (lump sum) now
3) $520,000 (lump sum) six years from now
The required rate of return is 9%.What is the present value if he selects the first option? Round to nearest whole dollar.
Present value of annuity of $1:
$$\begin{array} { | r | r | r | r | } \hline & 8 \% & 9 \% & 10 \% \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 1.783 & 1.759 & 1.736 \\\hline 3 & 2.577 & 2.531 & 2.487 \\\hline 4 & 3.312 & 3.24 & 3.17 \\\hline 5 & 3.993 & 3.89 & 3.791 \\\hline 6 & 4.623 & 4.486 & 4.355 \\\hline 7 & 5.206 & 5.033 & 4.868 \\\hline\end{array}$$
Present value of $1:
$$\begin{array} { | l | r | r | r | } \hline & { 8 \% } & { 9 \% } & 10 \% \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.681 & 0.65 & 0.621 \\\hline 6 & 0.63 & 0.596 & 0.564 \\\hline 7 & 0.583 & 0.547 & 0.513 \\\hline\end{array}$$

• A) $468,052
• B) $810,000
• C) $726,732
• D) $470,000

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