Question

After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large, well-known magazine subscription company. It has arrived with the good news that you are the big winner, having won $29 million. You have three options.

(a) Receive $1.45 million per year for the next 20 years.
(b) Have $10.25 million today.
(c) Have $2 million today and receive $1,150,000 for each of the next 20 years.
Your financial adviser tells you that it is reasonable to expect to earn 12 percent on investments.
Requirement:

Answer 1

To determine the best option for receiving the $29 million prize, we need to calculate the present value of each option and compare them.

Step-by-step explanation:

To determine the best option for receiving the $29 million prize, we need to calculate the present value of each option and compare them.

Option (a) offers $1.45 million per year for the next 20 years. Using the formula for the present value of an annuity, we can calculate the present value of this option as: PV = $1.45 million x (1 - (1 + 0.12)^-20) / 0.12 = $15,730,102.23.

Option (b) provides $10.25 million today. Since we are considering a 12% annual rate of return, the present value of this option is simply $10.25 million.

Option (c) gives $2 million today and $1,150,000 for each of the next 20 years. Again, using the present value of an annuity formula, we can calculate the present value of this option as: PV = $2 million + $1,150,000 x (1 - (1 + 0.12)^-20) / 0.12 = $18,027,445.48.

Comparing the present values, it is clear that option (c) with a present value of $18,027,445.48 is the best choice for receiving the $29 million prize.