Final answer:
The best choice depends on the interest rate. If the interest rate is 7% per year, the series of payments is better, but if the interest rate rises to 10%, the lump sum is more advantageous. The friend should calculate the present value using the current interest rate to decide.
Step-by-step explanation:
To decide whether to accept the lump sum or the series of payments from the baseball game raffle win, we need to calculate the present value of each option using the given interest rates. At 7% per year, the series of future payments would have a present discounted value calculated as follows: $1,000 (received today) + $1,000 / (1+0.07) + $1,000 / (1+0.07)^2. At 10% per year, for the same series of payments, we would calculate the present value as: $1,000 (received today) + $1,000 / (1+0.10) + $1,000 / (1+0.10)^2.
For the first case (7% interest), the calculation yields: $1,000 + $934.58 + $873.44 = $2,808.02, which is slightly greater than the lump sum of $2,800. Therefore, at 7%, it's better to accept the series of payments. However, at 10%, the present value of the series is $1,000 + $909.09 + $826.45 = $2,735.54, which is less than the lump sum. So, at 10%, the lump sum is the superior choice.
The most helpful advice for your friend would be to perform these present value calculations with the current interest rate to see which option has a higher present value and make a decision accordingly.