Question

Alexandra has just won a lottery of RM61 million. The organizer of the lottery has given her 3 options to choose.

Option 1 receive a lump sum of RM61 million today
Option 2 receive 10 end-of-year payments of RM9.5 million
Option 3 receive 30 end-of-year payments of RM5.5 million

Answer 1

To determine the best option, we can compare the present value of each option. Option 3 has the highest present value and would be the best choice.

Step-by-step explanation:

This question involves the concept of present value and future value in finance. To determine the best option, we can compare the present value of each option.

Option 1: Lump sum of RM61 million today. This option has no future payments.

Option 2: Receive 10 end-of-year payments of RM9.5 million. To calculate the present value, we can use the formula:

PV = PMT × [(1 - (1 + r)^-n) / r], where PV is the present value, PMT is the payment per year, r is the discount rate, and n is the number of years. Using a discount rate of 6% (0.06) for example, the present value is approximately RM67.26 million.

Option 3: Receive 30 end-of-year payments of RM5.5 million. Using the same formula with a discount rate of 6%, the present value is approximately RM67.63 million.

Comparing the present values, Option 3 has the highest present value and would be the best choice.