Solution
Solution
1. You have won the state lottery. There are two ways in which you can receive your
prize. You can either have $1 million in cash now, or you can have $1.2 million that
1. If you choose to get $1.2 million paid out over the next three years, the present value
of those payments is:
2. The drug company Pfizer is considering whether to invest in the development of a
new cancer drug. Development will require an initial investment of $10 million now;
2. a. The net present value is:
−$10 million + $4 million
1.12 + $4 million
1.122 + $4 million
1.123 = −$392,675
S-147
10 A
CHAPTER
Appendix: Toward a
Fuller Understanding
of Present Value
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Solution
S-148 CHAPTER 10 APPENDIX TOWARD A FULLER UNDERSTANDING OF PRESENT VALUE
3. Suppose that a major city’s main thoroughfare, which is also an interstate highway,
will be completely closed to traffic for two years, from January 2014 to December
2015, for reconstruction at a cost of $535 million. If the construction company were
to keep the highway open for traffic during construction, the highway reconstruction
project would take much longer and be more expensive. Suppose that construction
3. a. The present value of plan (i) is:
$267.5 million
1.1 + $267.5 million
1.12 = $243.18 million + $221.07 million =
$464.25 million
b. The present value of plan (i) is:
$267.5 million
1.8 + $267.5 million
1.82 + $148.61 million + $82.56 million =
$231.17 million
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