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Author Question: CongratulationsYou have just won a 1,000,000 (delayed) prize in the lottery. Your state offers you ... (Read 34 times)

Starlight

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on: Jun 29, 2018
CongratulationsYou have just won a 1,000,000 (delayed) prize in the lottery. Your state offers you the following alternatives:you can take 750,000 now, or 10 years from now you can receive the full 1,000,000.
 
  The delay isn't a problem, because you weren't planning to use any of the prize money for at least 10 years. If you take the lump sum now, you figure you can invest it at an annually compounded rate of 3 percent. Should you take the 750,000 now, or wait to get the full 1,000,000 in 10 years?Why or why not?Show any calculations.

Question 2

If purchasing power parity tells us that if the exchange rate is a pound for a dollar, then price of a haircut in London should cost the same as a haircut in New York.
 
  Indicate whether the statement is true or false


Expo

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Reply #1 on: Jun 29, 2018
Answer to Question 1

You should take the 750,000 now.
Here are the relevant calculations:
750,000  (1 + 0.03)10 = 1,007,937.
So you would be 7,937 better off by taking the smaller amount now than receiving the full prize in 10 years.This assumes that you will, in fact, achieve an annually compounded return of 3 percent for the next 10 years.
A-head: INVESTMENT RETURNS
Concept: Comparing future values

Answer to Question 2

FALSE


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