Francis Peabody just won the $89,000,000 California State Lottery. The lottery offers the winner a choice of receiving the winnings in a lump sum or in 26 equal annual installments to be made at the beginning of each year
Assume that funds would be invested at 7.65%. Francis is trying to decide whether to take the lump sum or the annual installments. What is the amount of the lump sum that would be exactly equal to the present value of the annual installments? Round off to the nearest $1.
A) $89,000,000
B) $38,163,612
C) $13,092,576
D) $41,083,128
Answer: D
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Are the statements identified as Concept 3 and Concept 4 correct?
Linda Pyle is head of analyst recruiting for PPA Securities. She has been very frustrated by the number of job applicants who, in spite of their stellar pedigrees, seem to have little understanding of basic financial concepts. Pyle has written a set of conceptual questions and simple problems for the human resources department to use to screen for the better candidates in the applicant pool. A few of her corporate finance questions and problems are given below. Concept 1. “A company invests in depreciable assets, financed partly by issuing fixedrate bonds. If inflation is lower than expected, the value of the real tax savings from depreciation and the value of the real after-tax interest expense are both reduced.” Concept 2. “Sensitivity analysis and scenario analysis are useful tools for estimating the impact on a project’s NPV of changing the value of one capital budgeting input variable at a time.” Concept 3. “When comparing two mutually exclusive projects with unequal lives, the IRR is a good approach for choosing the better project because it does not require equal lives.” Chapter 2 Capital Budgeting 19 part-i-02 13 January 2012; 10:13:21 Concept 4. “Project-specific betas should be used instead of company betas whenever the risk of the project differs from that of the company.” Problem. “Fontenot Company is investing h100 in a project that is being depreciated straight-line to zero over a two-year life with no salvage value. The project will generate earnings before interest and taxes of h50 each year for two years. Fontenot’s weighted average cost of capital and required rate of return for the project are both 12 percent, and its tax rate is 30 percent. A. No for Concepts 3 and 4. B. No for Concept 3, but yes for Concept 4. C. Yes for Concept 3, but no for Concept 4.
A no-fault law under which benefits are paid to an accident victim without regard to fault and the accident victim can still sue the negligent driver who caused the accident is referred to as a(n)
A) pure no-fault law. B) add-on no-fault law. C) modified no-fault law. D) choice no-fault law.