Mumbai University Principles of Finance Questions

Question Description

I’m working on a accounting test / quiz prep and need a sample draft to help me learn.

2. Everyone at some point dreams that they will win the lottery. For this week’s discussion board, imagine that you did just that! You are going through the pockets of your summer clothes and you find an old lottery ticket. You check online at www.megamillions.com and find that you have the winning ticket!. The jackpot is $64 million, spread over 30 annual payments! We will assume that the payments are equal (they aren’t), so the payment would be 2.133 million per year. You would collect the first payment immediately and then receive annual payments. If you want to take all cash up front, the payment is $40 million. Based on what you have learned so far in finance, you know that a dollar today is worth more than a dollar tomorrow, so that the $64 million prize over 30 years is worth something less today. You wonder if $40 million is fair; it sounds like so much less than $64 million (although it is still a lot of money!!). What should you do? This is a present value of an annuity problem. Is the present value of the annual payments more or less than $40 million?Questions:1. Calculate the present value of your potential payments, using present value of annuity calculations (This is an annuity due – payments are at the beginning of the period. Don’t forget to press BGN on the calculator). Remember this is a real-life problem, so you have to decide what interest rate is right for you. Why did you pick the rate you did? (Some factors to consider – What rate could you earn if you were to invest the $40 million; how much risk are you assuming by waiting; do you have debts to pay and at what interest rate; what would you do if you got that much money all at once? Note: the lottery will deduct estimated taxes from your proceeds; ignore this.)2. Now calculate the rate the lottery is giving you. Solve for the rate where the present value of the payments is equal to $40 million.3. What risks are you assuming as an investor if you decide to take the periodic payments?4. Below is taken from the FAQs at www.megamillions.com. Note that instead of equal payments, the lottery actually starts lower and increases the payments by 5% per year. This does not increase the total of $64 million; it justs moves more of the cash to later points in the payment stream. Why do you think the lottery does this?What are the payout options?If you are a Mega Millions jackpot winner, you will have the choice of a Cash Option or an Annual Payout. Annuity option: Provides for an initial annual payment followed by 29 annual payments. Each payment is 5 percent larger than the previous one. Cash option: A one-time, lump-sum payment that is equal to all the cash in the Mega Millions jackpot prize pool. Prize claim parameters vary from state to state. Contact your Mega Millions state lottery for detailed information.5. What would you do?There is no right or wrong answer, and everyone’s conclusion could be different.Post the results of your analysis, outlining your thought process and assumptions. Length should be no longer than 200-250 words,

Explanation & Answer:
250 words

Tags:
finance

Economy

Payments

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