ScholarMatic: Explanation & Answer
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You win the grand prize on a game show. You have the following choices:
Option 1: $1-million dollars paid as a $25?000 annuity every year over 40 years.
Option 2: The present value of option 1 if the current interest rate is 4%, compounded annually.
You accept Option 2, but invest your prize money in an annuity that will still pay you $25,000 every year. Your bank offers you 5% interest, compounded annually. Over 40 years how much more money would you have earned than if you accepted Option 1?
This assignment is worth 5 marks. Use the following information to guide your work:
1 mark for showing work to find present value
1 mark for the correct present value
1 mark for showing work to find the interest of the reinvestment
1 mark for finding the total amount of the reinvestment
1 mark for finding the correct difference
ScholarMatic: Explanation & Answer
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