Question

You won a lottery and you have two options for receiving the money. You can receive a lump sum of $50,000 today or receive future payments of $8,000 every year for ten years (first payment will start in one year). The discount rate is 7%. Which option should you take and why?

Answer 1

If there is no pressure for taking the money today the second option is a better deal: 56,188.65 to 50,000

Step-by-step explanation:

We will check if the present value of the 10 years annuity of 8,000 discounted at 7% is better than 50,000 today:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 8,000 dollars

time 10 years

rate 7% = 7/100 = 0.07

`8000 * (1-(1+0.07)^(-10) )/(0.07) = PV\\`

PV $56,188.6523