You win the grand prize on a game show. You have the following choices:

Option 1: $1-million dollars paid as a $25 000 annuity every year over 40 years.

Option 2: The present value of option 1 if the current interest rate is 4%, compounded annually.

You accept Option 2, but invest your prize money in an annuity that will still pay you $25,000 every year. Your bank offers you 5% interest, compounded annually. Over 40 years how much more money would you have earned than if you accepted Option 1?

This assignment is worth

5 marks

. Use the following information to guide your work:

1 mark for showing work to find present value

1 mark for the correct present value

1 mark for showing work to find the interest of the reinvestment

1 mark for finding the total amount of the reinvestment

1 mark for finding the correct difference