Question

Lucky louie just won the lottery!! he has a choice of taking $1,000,000 in cash or receiving $50,000 per year for 30 years beginning at the end of this year. the best way to make this choice is to

Answer 1

calculate the present value of the annuity payments.

Step-by-step explanation

The present value of an annuity is the current value of future payments from an annuity, given a specified rate of return or discount rate. The annuity's future cash flows are discounted at the discount rate. Thus, the higher the discount rate, the lower the present value of the annuity. It is calculated based on the amount payments on your specific situation. The manual formula is Annuity Value = Payment Amount x Present Value of an Annuity (PVOA) factor

Answer 2

Given that Lucky won $1000000 and has an option of receiving $50000 p.a for 30 years, the total amount received after 30 years in case he goes for option 2 will be:
amount=(yearly payment)+(number of years)
=(50000)×(30)
=$1,500,000
This implies that the second option is best choice. Given the information, we shall conclude that the best thing to do is to calculate the present value of the annuity payments.
The answer is D]