Finance Discussion

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Topic: Finance Discussion
The net amount won is $1,000,000. There are two payment methods:
1 Being paid $50,000 per year for 20 years
2 Being given a one-time payment of $560,000
The use of the net present value will help us find the most viable option. The NPV can be expressed as such a factor that will produce an Internal Rate of Return of 0 for a set of positive and negative cash-flow provided. Positive cash-flow is the amount you will be paid; either one-time payment or the 20 year payment. The negative cash-flow will be depicted by the amount set aside by the Lottery firm to pay you.
The NPV will be calculated using this formula;
-P+C.F.1+XN=0 , where;
P=principal amount.
C.F= cash-flow
X= net present value
N=installments
For the first payment option,
P=$1,000,000
C.F=$50,000
N=20… (N is spread over 20 years)
-1,000,000+500001+X1+500001+X2+500001+X3+500001+X4+500001+X5+…+500001+X20=0
Solving for x using Arithmetic series, x will be equal to 0.6425
For the second option;
P= $1,000,000
N=1, C.F. = $560,000
-1,000,000+560,0001+x=0
11+x=1000000560000
X=0.56 – 1 = -0.44
If the NPV<0, the stakeholder’s return would decrease in the long run
If the NPV>0, the stakeholder’s return would increase in the long run. Therefore, it would be advisable to choose the option where your money would increase in the long run.
The first option seems viable though patience is required in the long run, as you would be receiving $50,000 annually which you may invest to e...