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Author Question: After winning the lottery, you state that you are indifferent between receiving twenty 500,000 ... (Read 98 times)

luminitza

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on: Jul 10, 2018
After winning the lottery, you state that you are indifferent between receiving twenty 500,000 end-of-the-year payments (first payment one year from today), or a lump sum of 5,734,961 today.
 
  What interest rate are you using in your decision-making process such that you are indifferent between the two choices?
  A) 5.00
  B) 6.00
  C) 7.00
  D) 8.00

Question 2

You have won the lottery and received a check for 1,275,156 today. You invest the lottery check today at an annual interest rate of 8 and allow it to build for a full ten years.
 
  At that point in time, you shift the money to an account paying only 6 per year. You plan to spend 175,000 per year in retirement (assume equal annual end-of-the-year cash flows) for 30 years, and your first retirement cash flow is exactly eleven years from today. Will you have enough money to fully fund your desired retirement? Use a calculator to determine your answer.
  A) Yes, because your investment will allow you to spend up to 225,000 per year in retirement.
  B) No, because your investment will allow you to spend up to only 158,000 per year in retirement.
  C) Yes, because your investment will allow you to spend up to 200,000 per year in retirement.
  D) No, because your investment will allow you to spend up to only 137,000 per year in retirement.


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potomatos

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Reply #1 on: Jul 10, 2018
Answer to Question 1

Answer: B
Explanation: B) This is an iterative process (trial and error). Solve using the RATE function in Excel.
MODE = END
INPUT 20 ? -5,734,961 500,000 0
KEY N I/Y PV PMT FV
CPT 6.00

Answer to Question 2

Answer: C
Explanation: C) Calculator Solution for money you will have at the end of 10 years:
MODE = END
INPUT 10 8.0 -1,275,156 0 ?
KEY N I/Y PV PMT FV
CPT 2,752,966.16

Calculator solution for the (present value of) the money you need at the end of 10 years:
MODE = END
INPUT 30 6.0 2,752,966.16 ? 0
KEY N I/Y PV PMT FV
CPT 200,000


luminitza

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Reply 2 on: Jul 10, 2018
:D TYSM

rachel

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Reply 3 on: Yesterday
Great answer, keep it coming :)

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