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Are there any Finance majors on here?

nfl46

nfl46

macrumors G3
Original poster
Oct 5, 2008
8,867
11,016
Hey, I need help with a Finance problem that I cannot seem to figure out. :(Are there any on here?

Mike just won the lottery, and he must choose between three award options. He can elect to receive a lump sum today of $61 million, to receive 10 end-of-year payments of $9.5 million , or 30 end-of-year payments of $5.5 million.

A. If he thinks he can earn 7 percent annually, which should he choose?

I'm thinking this is a FVa problem...ordinally annuity. I'm not sure...

Thanks!
 
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Thanks! I kinda see how you're doing it but I'm confused. See, in class, we never used the formula.

We set it up like this, so we can put it in our calculators.


Fva =
N = 10
I = 7%
PmT = -9,500,000

FVA = 131,256,255.60?

But I'm not sure what I'm doing wrong. Your answers def. look right!
 
It's a Present Value of an Annuity problem.

You need to figure out the PV's of the payment options, compare them to the lump sum payment, and choose the highest amount.


You can do it as a FVA, but then you'd have to figure out the Future Value of the Single Sum of $61 million. Why do extra work?
 
Lump sum is gonna be 61 million right...thats option 1
option 2 is the 10 yr payments of 9.5

so you'll put in..(make sure your calculator is set to END)

N=10
I = 7%
PMT = -9,500,000
FV = 0
PVa = 66,724,024.64 (which is option 2 answer)

Option 3 is

N = 30
I = 7
PMT = -5,500,000
FV= 0
PVa = 68,249,726.51 (which is option 3 answer)

So, for A I would choose option 3.

OMG! Did I do this right?
 
Looks good to me as well. Also an accounting major, but we do TVM stuff all the time; plus, I just took a finance course last semester, so hopefully I haven't lost the basics that quickly.
 
FYI to you admiring CPAs... I just graduated in Accounting and the exam here in LA is $750 bucks plus the study materials... and the books from Gleim are a bitch... good luck... I'm hoping to take the exam in August...


Sorry to detract from the OP
 
h0e0h said:
FYI to you admiring CPAs... I just graduated in Accounting and the exam here in LA is $750 bucks plus the study materials... and the books from Gleim are a bitch... good luck... I'm hoping to take the exam in August...


Sorry to detract from the OP
Click to expand...

Yeah, one of my professors used Gleim, I don't know if I could focus enough without a class. I'm going on to a MS in Accounting or Tax program and then hopefully to a firm that will pay for a review course and my exam. I think the Big 4 pay for either Becker or Roger, so I'm hoping to avoid the $1500+ for one of those courses by working there for a few years.

Do you have to take the whole exam at the same time in LA? Out here in California we can take a section at a time, makes it a bit easier to study for.
 
you can take each section at at time, but you only have 18 months to complete the entire exam... I got 2 BBAs in school, one in Marketing and one in Accounting, and am currently working in a field with my Marketing degree... I have no ambition to work for any of the Big 4, but to work in some sort of tax field... teh exam is still going to be a biotch either way...
 
nfl46 said:
OMG! Did I do this right?
Click to expand...

Just make sure you know where the zero point is in the formula, especially if they are a lot closer in value like for car payment options and the amounts for the answer might be a lot closer to each other.

Since the PV of the first payment is the payment, then you figure out the PV of the revenue stream. aka PV of 9 or 29 payment + the 9.5 or 5.5 million.

Or use the formula that lets you chose how to handle the first payment and whether it is beginning or end of period (where you'd calculate interest bringing it back to PV).
 
Sun Baked said:
Since the PV of the first payment is the payment, then you figure out the PV of the revenue stream. aka PV of 9 or 29 payment + the 9.5 or 5.5 million.
Click to expand...

But the payment is at the end of the year, so the PV isn't the payment itself. That would be correct if the payment was at the beginning of the period, then there is no need to discount it. The calculation would be more accurate if we were given a date of the lottery win, but when its not specified assuming that the win occurred on Jan 1 2xx1 and the end of year payment will occur Dec 31 2xx1 is a fairly safe bet. Luckily, financial calculators and the TI83 Finance app let you select whether the payment occurs at the beginning or end of period, so you never really have to deal with the not discounting a period because of when the payment occurs, just understand that it occurs.

Finz151 said:
I can see it looks hard
Click to expand...

Its not terrible, but its not easy. These type of calculations are from the entry level course, in fact, you'll probably have to do most of this if you're any major in the business department. As long as you understand algebra and can remember how calculations and formulas relate to each other you'll do fine, at least in the intro class. Math skills are definitely important, but most of your finance classes will probably be easier than your Calculus I or II class.
 
rhsgolfer33,

People would go nuts if they really had to wait a year to get their first annuity payment ... ;)
 
Sun Baked said:
People would go nuts if they really had to wait a year to get their first annuity payment ... ;)
Click to expand...

True. :eek:

The wording of the question suggests that it is an annuity problem, in which the payments occur at the end of each period.

If the question suggested that the payments occur at the beginning of each period, the annuity due function or formula would have been used (and the calculated results would be different). Then the winner wouldn't be so anxious to get his money. :p

(I can't tell from your post if you know this info already or not. EDIT: I think you do, based on the ;) that I seemed to miss.)
 
Sun Baked said:
rhsgolfer33,

People would go nuts if they really had to wait a year to get their first annuity payment ... ;)
Click to expand...

I'd go insane, glad its not a real life situation. Though I suppose if I won the lottery I probably wouldn't be too mad about having to wait a year, I mean, at least I'd have something really awesome to look forward to. ;)

The problem he gave us did say end of the year though, so that is probably how he should calculate it. Unfortunately most of the finance problems we get in the Intro course aren't super realistic.

I also love the finance discussion on the MacRumors board, looks like there are at least a few accountants and finance professionals outside of the Windows world where most of them seem to reside.
 
rhsgolfer33 said:
The problem he gave us did say end of the year though, so that is probably how he should calculate it. Unfortunately most of the finance problems we get in the Intro course aren't super realistic.
Click to expand...

Guess your intro course was a bit easier, since my professor decided on showing some of the old fashion scams they'd use in buy here pay here car lots to puff up the IRR on your payments before the APR had to be disclosed.

So a simple mix up of beginning and end of period had you losing several points on the questions.

Of course it was an engineering course teaching finance, so it was a bit more twisted and more math based than the Business School course. So showing your work was a help.
 
Sun Baked said:
Guess your intro course was a bit easier, since my professor decided on showing some of the old fashion scams they'd use in buy here pay here car lots to puff up the IRR on your payments before the APR had to be disclosed.

So a simple mix up of beginning and end of period had you losing several points on the questions.

Of course it was an engineering course teaching finance, so it was a bit more twisted and more math based than the Business School course. So showing your work was a help.
Click to expand...

Yeah, we did similar stuff, and lots of students lost points for mixing up beginning and end of period on questions involving annuities. The other one that gets students is semi-annual bonds. Our professor (a former banking CFO) gave good real life examples as well, but a lot of the actual cases were simplified in various ways. As an accounting major I did TVM, bond valuation, IRR, NPV, etc. in 2 or 3 courses before the principles of finance course, so principles of finance was pretty easy most of the time.

I can imagine an engineering finance course would be pretty heavy into showing calculations. Engineers certainly have me beat on the math front, I really have to focus on anything above a college algebra course. Calculus is going to eat me alive next semester.
 
Hey, guys, I was just writing in this topic to tell you that the answer was correct! Thanks a lot! I got a 10/10 on the homework.

Surprisingly, only 52% of the class got the problem correct. Most got a few things mixed up.

Thanks!
 
Good job. It is always nice to get finance problems correct. It can be a tough class since a single small mistake can mess up entire problems and cases, practice is key (as with most things).
 
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