Evaluating lump sums and annuities
Crissie just won the lottery, and she must choose between three award options. She can elect to receive a lump sum today of $60 million, to receive 10 end-of-year payments of $9.3 million, or 30 end-of-year payments of $5.3 million.
1. If she thinks she can earn 7% percent annually, which should she choose?
a. Select-She should accept the 30-year payment option as it carries the highest present value
b. She should accept the lump-sum payment option as it carries the highest present value
c. She should accept the 10-year payment option as it carries the highest present value
d. She should accept the lump-sum payment option as it carries the highest future value
2. If she expects to earn 8% annually, which is the best choice?
a. Select-She should accept the lump-sum payment option as it carries the highest present value
b. She should accept the 30-year payment option as it carries the highest present value
c. She should accept the 10-year payment option as it carries the highest present value
d. She should accept the lump-sum payment option as it carries the highest future value
3. If she expects to earn 9% annually, which would you recommend?
a. Select-She should accept the lump-sum payment option as it produces the highest present value
b. She should accept the 30-year payment option as it produces the highest present value.
c. She should accept the 10-year payment option as it produces the highest present value
d. She should accept the 30-year payment option as it produces the highest future valueItem 3
4. Explain how interest rates influence the optimal choice.
a. The higher the interest rate, the more valuable it is to get money rapidly
b. The lower the interest rate, the more valuable it is to get money rapidly
c. The higher the discount rate, the higher the more distant cash flows are valued
d. Interest rates do not influence the optimal choice in any way
e. Interest rates and the present value of cash flows are positively related