Please respond to the below discussion thread. For your response, create a new thread at the top-level of the DQ 2 threa
Posted: Wed Mar 30, 2022 3:45 pm
Please respond to the below discussion thread. For your
response, create a new thread at the top-level of the DQ 2 thread.
If you don't get the calculation right it's not a problem. The goal
is to go through a detailed TVM example as a class. DQ 2 Question
Since we're talking about applying the TVM to a lottery scenario
let's actually go through an example. Imagine the following
scenario. Congratulations! You just won the local lottery. You are
given the choice of receiving either of the following: i) $10,000
each year for the next ten years starting in one year, or ii) a
lump-sum payment today of $70,000. You want to determine which is
the preferable option, the annuity or the lump-sum payment today.
To help you in your analysis your friend, Banker Brad, tells you
that you could lock-in an interest rate of 4% for the next 10 years
were you to make any investments this week. (Assume taxes and
life-expectancy are not an issue.) Which would you choose and why?
What calculations would you use (i.e. applying the TVM) to
determine your answer. (Calculate the present value of the annuity
and then compare it to the lump-sum payment.) Anyone who wants to
take a stab at this feel free to post your thoughts. I'll post my
solution a little later in the week. Just to summarize here, use
the 4% as your discount rate for the TVM analysis and ignore things
such as taxes and life-expectancy, etc. We want to really focus on
the math of the TVM in this example. Thanks!
response, create a new thread at the top-level of the DQ 2 thread.
If you don't get the calculation right it's not a problem. The goal
is to go through a detailed TVM example as a class. DQ 2 Question
Since we're talking about applying the TVM to a lottery scenario
let's actually go through an example. Imagine the following
scenario. Congratulations! You just won the local lottery. You are
given the choice of receiving either of the following: i) $10,000
each year for the next ten years starting in one year, or ii) a
lump-sum payment today of $70,000. You want to determine which is
the preferable option, the annuity or the lump-sum payment today.
To help you in your analysis your friend, Banker Brad, tells you
that you could lock-in an interest rate of 4% for the next 10 years
were you to make any investments this week. (Assume taxes and
life-expectancy are not an issue.) Which would you choose and why?
What calculations would you use (i.e. applying the TVM) to
determine your answer. (Calculate the present value of the annuity
and then compare it to the lump-sum payment.) Anyone who wants to
take a stab at this feel free to post your thoughts. I'll post my
solution a little later in the week. Just to summarize here, use
the 4% as your discount rate for the TVM analysis and ignore things
such as taxes and life-expectancy, etc. We want to really focus on
the math of the TVM in this example. Thanks!