Question

Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum , or in two identical payments. If you pick the lump sum, you get $2893 today. If you pick payments over time, you get two identical payments, the first one today, and the second one 1 year from today. Suppose the interest rate is 6%. What would the amount of one of the identical payments have to be in order for you to consider either choice equal

Answer 1

Amount of identical payment = $1,488.631

Step-by-step explanation

The two identical payments receivable in the future is referred to as an annuity. So e can use the present value of the annuity formula to work out the annual amount payable

The present value f an annuity due = A × (1- (1+r) ^-n/r) × (1+r)

A-constant amount.- r- interest ate, n- number of years

2,893 = A∠× (1- 1.06^(-2)/0.06)× (1.06)

2,893 = A × 1.943396226

A= 2,893/1.9433

A= 1488.631068

Amount of identical payment = $1,488.631