Archive for April, 2009
Financial Investments For Lottery Winners
April 24th, 2009
Question: need help with this accounting question?
You have just won the state lottery and have two choices for collecting your winnings. You can collect $40,000 today or receive $9,810 per year for the next 5 years. A financial analyst has told you that you can earn 10 percent on your investments. Which alternative should you select?
Present value of annuity: $9,810 × ? = $ ?
Because the present value of the annuity is less than the immediate cash payment, the winner should select the cash payment .
Answer: You need to use a present value of an annuity table to find the present value factor to be used. Look up the factor under the 10% column and the 5 period row.
That factor is 3.791
Present value of the annuity: $9,810 × 3.791 = $ 37,189.71
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Because the present value of the annuity is less than the immediate cash payment, the winner should select the cash payment .
That is a true statement, and it is based on the concept of the time value of money. It’s better to have $40,000 today than have an annuity with a present value of
$ 37,189.71
Tip 3 – Why do lottery winners go bankrupt?
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