Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 26: Q23E (page 1469)

Congratulations! You have won a state lottery. The state lottery offers you the following (after-tax) payout options:

Option #1: \(12,000,000 after five years

Option #2: \)2,150,000 per year for five years

Option #3: $10,000,000 after three years

Assuming you can earn 6% on your funds, which option would you prefer?

Short Answer

Expert verified

Option #2 would be preferable.

Step by step solution

01

Meaning of Lottery

A lottery could be a kind of gaming in which members buy numbered tickets. The numbers on tickets are picked, and those with particular numbers on their tickets win a prize.

02

Analyzing the various option

Option #1

Presentvalue=Amountrecceivableattheendof5thyear×PVF@6%,5year=$12,000,000×0.747=$8,964,000

Option #2

Presentvalue=Amountrecceivableattheendof1stto5thyear×PVF@6%,5year=$2,150,000×4.212=$9,055,800

Option #3

Presentvalue=Amountreceivableattheendof3rdyear×PVF@6%,3year=$10,000,000×0.840=$8,400,000

Option #2 depicts more present value as compared to the other option. So, option #2 will be preferable.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Using the payback method to make capital investment decisions

Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4. Compute the payback for the expansion project. Round to one decimal place.

Your grandfather would like to share some of his fortune with you. He offers to give you money under one of the following scenarios (you get to choose):

1. \(7,250 per year at the end of each of the next eight years

2. \)49,650 (lump sum) now

3. $98,650 (lump sum) eight years from now

Requirements

1. Calculate the present value of each scenario using an 8% discount rate. Which scenario yields the highest present value? Round to nearest whole dollar.

2. Would your preference change if you used a 10% discount rate?

How can spreadsheet software, such as Excel, help with sensitivity analysis?

David is entering high school and is determined to save money for college. David feels he can save $6,000 each year for the next four years from his part-time job. If David is able to invest at 7%, how much will he have when he starts college?

Refer to Short Exercise S26-4. Continue to assume that the expansion has no residual value. What is the project’s IRR? Is the investment attractive? Why or why not?
See all solutions

Recommended explanations on Business Studies Textbooks

Corporate Finance

Read Explanation

Nature of Business

Read Explanation

Organizational Behavior

Read Explanation

Strategic Direction

Read Explanation

Intermediate Accounting

Read Explanation

Influences On Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free