After reading Chapter 5 of the textbook Moyer, McGuigan, and Rao (2018), which covers the concept of Time Value of Money and demonstrates the applicability of discounting and annuity calculations, consider the following scenario:
You are a winner in a state lottery and the payout due to you after taxes was $20 million. The lottery commission makes you two payout offers:
A 20-year annual payment stream of $1,199,151.34 starting immediately or a lump sum of $20 million.
You made contact with your bank and they informed you that the rate they could pay you if you deposited the lump sum with them would be 1%.
Write a short essay explaining the Time Value of Money.
The essay must follow the following format:
Introduction:
Briefly state the purpose of the essay.
Body: Make sure to answer the following in your essay:
Explain the concept of Time Value of Money.
Which payout offer is better for you financially? Why is it better?
In your explanation, state the interest rate that the lottery commission used in the transaction.
Note: Show your calculations within the essay.
Conclusion: End the essay with a brief conclusion.
Moyer, R. C., McGuigan, J. R., & Ramesh P. R. (2018). Contemporary financial management (14th ed.)
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