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Question 2. Answer the following questions related to the discounted cashflows valuation. (10%).

a) As you increase the length of time involved, what happens to the present value of an annuity? What happens to the future value? (2%)

b) What happens to the future value of an annuity if you increase the rate, r? What happens to the present value? (2%)

c) Tri-State Megabucks Lottery advertises a 10-million-dollar grand prize. The winner receives 500.000 today and 19 annual payments of 500.000. A lump sum option of 5 million payable immediately is also available. Is this deceptive advertising? (2%)

d) Suppose you won the Tri-State Megabucks Lottery in the previous question. What factors should you consider in deciding whether you should take the annuity option or the lump sum option? (2%)

e) If you were an athlete negotiating a contract, would you want a big signing bonus payable immediately and smaller payments in the future, or vice versa? How about looking at it from the teams perspective? (1%)

f) Suppose two athletes sign 10-year contracts for 80 million. In one case, we are told that the 80 million will be paid in 10 equal installments. In the other case, we are told that the 80 million will be paid in 10 installments, but the installments will increase by 5 percent per year. Who go the better deal? (1%)

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