The Time Value of Money

1.Congratulations! You have just won the lottery! However, the lottery bureau has just in" rel="nofollow">informed you that you can take your win" rel="nofollow">innin" rel="nofollow">ings in" rel="nofollow">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. Usin" rel="nofollow">ing a discount rate of 5 percent, based on present values, which would you choose? Usin" rel="nofollow">ing 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 approachin" rel="nofollow">ing such problems? (Make your choices based purely on the time value of money.)2. Jia has just won a $20 million lottery, which will pay her $1 million at the end of each year for 20 years. An in" rel="nofollow">investor has offered her $10 million for this annuity. She estimates that she can earn 10 percent in" rel="nofollow">interest, compounded annually, on any amounts she in" rel="nofollow">invests. She asks your advice on whether to accept or reject the offer. What will you tell her? (Ignore Taxes) 3. You have provided your friend with a service worth $8,500. Your friend offers you the followin" rel="nofollow">ing cash flow in" rel="nofollow">instead of payin" rel="nofollow">ing $8,500 today. Should you accept his offer if your opportunity cost is 8 percent?