Reference no: EM132680013
A. Alfred Banda, a legal practitioner, has just won lottery amounting to K2,000,000. There has been an agreement between the Lottery Company and Alfred regarding the way payments will be made. The two parties have agreed to an equal annual instalment of K500,000. The lottery is not paying him immediately. The first payment will be made at the end of the sixth year. Assume that the opportunity cost of capital is 15%.
Suppose, instead, that Alfred has been told that he will receive his money in Twelve (12) equal monthly instalments with the first payment being made at the end of month 1. The lottery company has also assured Alfred of a 5% interest on the remaining balance.
i. Use an appropriate structure or computation to show the periodic payments and the associated interest.
ii. How much will Alfred have received in total by the beginning of the 7th Month?
iii. Consider the amount you have found in (ii) above. What is the present value of that amount if the monthly interest rate is 12%?
iv. Refer to (iii) above. Suppose that the alternative is to receive K1,400,000 today, then the remaining amount to be paid in equal instalments for a specified remaining period of part (ii) above . Which option is the best and why?
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