Question

You just won the Powerball and are offered two payment options: 1) Receiving $80 million per year for 25 years beginning at next year. 2) Receiving $850 million today. What do you choose if r

Answer 1

Answer: $80 million per year for 25 years

Step-by-step explanation:

The option you should choose is one that will guarantee you the highest present value.

This means that you need to discount the annual payment of $80 million per year for 25 years to find the present value. As you did not include a rate, we shall assume a rate of 8% for reference purposes.

The annual payment is an annuity so the present value can be calculated by:

Present value of annuity = Annuity payment * Present value interest factor, rate, no. of years

= 80,000,000 * Present value interest factor, 8%, 25 years

= 80,000,000 * 10.6748

= $‭853,984,000‬

The present value of the annual payment is more than the present value of the $850 million received today so the Annual payment should be taken.