Question

You just won a lottery that promises to pay you $1 million exactly 10 years from today. Because the $1 million payment is guaranteed by the state in which you live, opportunities exist to sell the claim today for an immediate lump-sum cash payment.

a. What is the least you will sell your claim for if you could earn 4.57 % on similar-risk investments during the 10-year period?
1. 6 percent
2. 9 percent
3. 12 percent
b. Rework part (a) under the assumption that the $1 million payment will be received in 15 rather than 10 years.
c. Based on your findings in parts (a) and (b), discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum.

Answer 1

The solution calculates the amounts a lottery winner could expect to receive in a sale of a state-guaranteed annuity payment plan for an immediate single cash payment today. The calculations are made at various interest rates and the solution contains comment about those calculations.

Step-by-step explanation: