Congratulations you have just won the tuition lottery! The lottery pays out four beginning-of-the-year cash flows of $50,000 each with the first cash flow today and the remaining cash flows to follow at the start of years 2, 3, and 4
Since the lottery is managed by the Fergetaboutit University system you are considering their offer of a lump sum of $160,000 today. If after considering all of he relevant economic factors, you conclude it is reasonable to use a 12% interest rate to compare these two offers. Which offer should you take and why?
A) Take the lump sum because the annuity PV is only $151,867.47.
B) Take the annuity because the PV of $170,091.56 is greater than the lump sum.
C) Take the annuity because the PV of $238,966.40 is greater than the lump sum.
D) Take the lump sum because the annuity PV is only $135,595.95.
B
Explanation: B) Via Calculator: N =4, I =12, PMT = 50,000, set timing to "Begin", Solve for PV = $170,091.56.
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