Author Question: Congratulations You have just won the lottery However, the lottery bureau has just informed you that ... (Read 101 times)

Mollykgkg · **on:** Jul 10, 2018

Congratulations You have just won the lottery However, the lottery bureau has just informed you that you can take your winnings in one of two ways. Choice X pays 1,000,000. Choice Y pays 1,750,000 at the end of five years from now.

Using a discount rate of 5 percent, based on present values, which would you choose? Using the same discount rate of 5 percent, based on future values, which would you choose? What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.)

Question 2

An investment advisor has recommended a 50,000 portfolio containing assets R, J, and K; 25,000 will be invested in asset R, with an expected annual return of 12 percent; 10,000 will be invested in asset J, with an expected annual return of 18

percent; and 15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is ________.
A) 12.67
B) 12.00
C) 10.00
D) 11.78

jsm54321 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

The PV of X = 1,000,000; The PV of Y = 1,371,000; The FV of X = 1,276,000; The FV of Y = 1,500,000. Based on both present values and future values, B is the better choice. Finding present values and future values are simply reverse processes of one another, and that choosing between two lump sums based on PV will always give the same result as choosing between the same two lump sums based on FV.

Answer to Question 2

B