Question

You just win a lottery. the lottery company promises to pay you $5000 every year forever. the first payment will be made 5 years from today. alternatively, you can choose to get a lump sum payment of $90,000 today. suppose the annual interest rate is 5%. which option should you choose?

Answer 1

Hello!

If you choose the sum of 90000 dollars at an annual interest rate of 5% then that is 4500 annually on return on the 90000 sum. So if u choose 5000 a year forever but starting after 5 years then it will take roughly 5yrs plus 90000/5000 = 90/5 = 18yrs plus the 5yrs is 23yrs and that is to only get the initial 90000 sum that at this same point in time is now worth 90000 + 4500*23yrs = 193,500 dollars if stated invested that entire time. So we can determine that the initial lump sum with and annual 5% interest rate is the much better choice.

Hope this helps you! Thank you!!!