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Time Value of Money, opportunity cost of capital, interest

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A. Suppose the opportunity cost of capital is 6% and you have just won a $2 million lottery that entitles you to $200,000 at the end of each year for the next 10 years.

1. What is the minimum lump sum cash payment you would be willing to take now in lieu of the 10-year annuity?

2. What is the minimum lump sum you would be willing to accept at the end of the 10 years in lieu of the annuity?

B. Using the appropriate interest factor table, answer each of the following questions (each case is independent of each other.)

1. Your company purchases a 5-year certificate of deposit which pays semi-annually and has a stated interest rate of 8 percent. The initial investment is $15,000. What is the future amount of your investment worth at the end of 5 years?

2. What amount must you put in the bank today if you will need $60,000 in 6 years for the cost of your child's college education? The bank will provide you with interest payments quarterly on your investment. The annual rate of interest you have been quoted is 10 percent.

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A. Suppose the opportunity cost of capital is 6% and you have just won a $2 million lottery that entitles you to $200,000 at the end of each year for the next 10 years.

1. What is the minimum lump sum cash payment you would be willing to take now in lieu of the 10-year annuity?

PVA = PMT x 1 - 1 where PVA is the present value
(1 + I)N PMT is the amount received each period
R I is the interest rate
N is the ...

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This solution is comprised of a detailed explanation to answer what is the minimum lump sum cash payment you would be willing to take now in lieu of the 10-year annuity.

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