Question

You are the lucky winner of the $30 million state lottery. You can take your prize money either as (a) 30 payments of $1 million per year (starting in one year), or (b) $15 million paid today. If the interest rate is 5.5%, which option should you take?

a. Option a, as it is equivalent to 15 333 101 $
b. Option a, as it is equivalent to 15 141 074 $
c. Option b
d. Option a, as it is equivalent to 15 372 451 $

Answer 1

You should take Option A, as it is equivalent to $15,372,451.

Step-by-step explanation:

The present value of Option A is the sum of the future values of the 30 payments of $1 million per year, discounted to the present using the interest rate. Using the formula for future value of an annuity, the future value of each payment is $1 million multiplied by (1 + 0.055) raised to the power of the number of years in the future.

The present value of Option A is the sum of these future values, which is approximately $15,372,451. Therefore, Option A is the better choice as it is equivalent to $15,372,451.