Author Question: John won the lottery on Monday and can take either 50,000 per year for 20 years, or 500,000 today. ... (Read 126 times)

fahad

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John won the lottery on Monday and can take either 50,000 per year for 20 years, or 500,000 today. Bill won
  the same lottery on Tuesday and has the same options for receiving the cash.
 
  A well respected financial advisor
  is hired by both John and Bill. The advisor recommends that John take the 50,000 per year for 20 years but
  advises Bill to take the 500,000 up front payment. How is it possible to give different advice to two clients
  regarding the exact same cash flows?

Question 2

No-fault benefits are provided by adding an endorsement to the auto insurance policy. What is this endorsement typically called?
 
  A) uninsured motorists coverage
  B) personal injury protection coverage
  C) nonowned vehicle liability coverage
  D) add-on benefits coverage


Heffejeff

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Answer to Question 1

The time value of money is based on opportunity cost. If John and Bill have different opportunity costs for funds, they
can each be making rational choices. For example, suppose Bill can earn 20 on the funds he receives by investing
them in his business, but John expects to earn only 2 by investing the lottery winnings in a certificate of deposit. Bill
will end up with more cash if he takes the 500,000 up front and invests it wisely, even though he is giving up 500,000
of future winnings. John, however, is better off taking the 50,000 per year, for a total of 1,000,000 over 20 years,
because he would not be able to make up the lost 500,000 by earning only 2 per year.

Answer to Question 2

Answer: B



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