Final answer:
It may be undesirable to receive installment payments for a large sum due to limited immediate financial utility, the possibility of not living to receive all installments, and the reduced present value of future payments due to inflation.
Step-by-step explanation:
Receiving large sums of money in installment payments such as a lottery jackpot has certain disadvantages. Installment payments limit the immediate use of the funds, therefore not allowing for significant purchases or investments that a person might want to make now. One major concern is that the recipient may not live sufficiently long to enjoy all the payments, reducing the lifetime utility and value of the winnings. Additionally, the value of money diminishes over time due to inflation, making future payments worth less than what one would receive today.
Another key point is the concept of present discounted value, which is an economic principle that emphasizes the fact that a sum of money to be received in the future is worth less than the same sum received today, because of the potential earning capacity if that money were invested. This concept applies to a variety of financial decisions, from retirement planning, where individuals purchase annuities for steady income, to lottery winnings, where the overall value of the prize diminishes if taken as an annuity over time compared to a lump sum. Hence, those who wish to make immediate large-scale investments or large purchases may find installment payments less desirable.
Moreover, discretionary income is the amount of income left after all necessary expenses are paid. If someone's discretionary income after basic expenses allows, they might prefer to receive a lump sum to invest or make significant purchases to enjoy immediately rather than wait for incremental payments over the years.