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Annuities: Astros's homerun hitting contest; evaluation the prize choices

Astros Co is sponsoring a homerun hitting contest, with the winner receiving a choice between two equivalent prizes. Prize 1 is a lump-sum amount to be paid on 10/1/05. Prize 2 pays a total of $90,000,000 as follows: $5,000,000 per year starting on 10/1/06 with the final payment made on 10/1/14, plus bonus payments of $15,000,000 on 10/1/05, 10/1/10 and 10/1/15. The interest rate for this type of prize structure is 5%.

** Compute the amount that:
1) The 9 payments of $5,000,000 contribute to the value of Prize 1
2)The 3 payments of $15,000,000 contribute to the value of Prize 1
3)Will be offered for Prize 1

**If prize 2 is selected and the payments are invested at 5% when received, compute the amount that:
4)The 9 payments of $5,000,000 from prize 2 will be worth at 10/1/15
5)The 3 payments of $15,000,000 from prize 2 will be worth at 10/1/15
6)The 12 total payments from prize 2 will be worth at 10/1/15

**7)If prize 1 is invested at 5% when received, compute the amount that prize 1 will be worth at 10/1/15

CLUE MUST MATCH::::The value at 10/1/15 of the 3 $15,000,000 payments is approximately $23,038,450 more than the value of the 9 $5,000,000 payments at 10/1/05

Solution Preview

Astros Co. is sponsoring a homerun hitting contest, with the winner receiving a choice between two equivalent prizes. Prize 1 is a lump-sum amount to be paid on 10/1/05. Prize 2 pays a total of $90,000,000 as follows: $5,000,000 per year starting on 10/1/06 with the final payment made on 10/1/14, plus bonus payments of $15,000,000 on 10/1/05, 10/1/10 and 10/1/15. The interest rate for this type of prize structure is 5%.

** Compute the amount that:
1) The 9 payments of $5,000,000 contribute to the value of Prize 1
We calculate the net present value of 5,000,000 for a period of 9 years. This can be ...

Solution Summary

the solution presents a detailed explanation of the formulas and calculations to arrive at the answer.

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