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Lab Insight: You win the lottery (yay!) and you’re trying to decide whether to take the $4,250,000 one-time lump sum or get $200,000 annually for life. Assume you’re 25 years old and expect to live until you’re 88. What should you do?
Required:
- Determine whether you should take the $4,250,000 as a lump sum payment or get $200,000 per year for life using net present value (NPV) and internal rate of return (IRR) analyses.Open Excel File Alt Lab 9-1 Data.xlsx and browse its contents.
- Note the differences between Alt Lab 9-1 and Lab 9-1.
- The net present value of cash flows should be evaluated using 3, 5, and 7 percent discount rates (different from the 2, 4, and 6 percent used in Lab 9-1).
- The annuity is paid from age 25 to 88 (different from the age 86 in Lab 9-1).
Ask the Question: Should you take $4,250,000 as a lump sum payment or get $200,000 per year for life?
Master the Data: Apply the same steps as Lab 9-1 to the Alt Lab 9-1 Data.xlsx dataset.
We’ll do two types of analyses, net present value analysis using the Excel NPV() function as well as internal rate of return analysis using IRR(). We’ll build the spreadsheet together to help perform this analysis.
Software needed
- Excel
- Screen capture tool (Windows: Snipping Tool; Mac: Cmd+Shift+4)
Data: Alt Lab 9-1 Data.xlsx
Perform the Analysis: Refer to Lab 9-1 Alternate in the text for instructions and Lab 9-1 steps for each the of lab parts.
Upload one Word or PDF document containing all of your screenshots for this Lab using the button below.
Note: Please submit your file attachment response in one of the approved file formats; Word file (.doc or .docx), Excel file (.xls or .xlsx), or PDF. To submit photo or image files please paste them into Word or PDF. Consult with your instructor as needed on their preferred file attachment format.
- Take a screenshot of the NPV analysis portion of the spreadsheet, paste it into a Word document named “Alt Lab 9-1 Excel SS.doc”, and label the screenshot Submission 1.
- Take a screenshot of the IRR analysis portion of the spreadsheet, paste it into your Word document named “Alt Lab 9-1 Excel SS.doc”, and label the screenshot Submission 2.