04-14-2011, 04:57 AM
“Discussion Question”
A few days ago, Mr. A has purchased a lottery. Fortunately, he has received a letter from the lotteryofficials that he has won that lottery. Additionally, it has been mentioned in the letter that he has to choose between one of the two given alternatives as his Prizemoney:
A: Rs. 4,000 every year for next 10 years or;
B: Rs. 54,000 after 10 years.
His opportunity cost is 11%.
required:
Find the value of each alternative.
Which alternative is acceptable for Mr. A and why?
Answer:
Mgt 201
GDB NO. 1
Idea Solution
Option A
=4000/1.11+4000/(1.11^2)+4000/(1.11^3)+4000/(1.11^4)+4000/(1.11^5)+4000/(1.11^6)+4000/(1.11^7)+4000/(1.11^8)+4000/(1.11^9)+4000/(1.11^10)
= 23556.93
Option B
= 54000/(1.1^10)
= 20819.34
Option A is Acceptable as it has high Present Value
A few days ago, Mr. A has purchased a lottery. Fortunately, he has received a letter from the lotteryofficials that he has won that lottery. Additionally, it has been mentioned in the letter that he has to choose between one of the two given alternatives as his Prizemoney:
A: Rs. 4,000 every year for next 10 years or;
B: Rs. 54,000 after 10 years.
His opportunity cost is 11%.
required:
Find the value of each alternative.
Which alternative is acceptable for Mr. A and why?
Answer:
Mgt 201
GDB NO. 1
Idea Solution
Option A
=4000/1.11+4000/(1.11^2)+4000/(1.11^3)+4000/(1.11^4)+4000/(1.11^5)+4000/(1.11^6)+4000/(1.11^7)+4000/(1.11^8)+4000/(1.11^9)+4000/(1.11^10)
= 23556.93
Option B
= 54000/(1.1^10)
= 20819.34
Option A is Acceptable as it has high Present Value