Question

Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 now OR $261,553.70 each year for the next 20 years. The sponsor of the prize uses a 6% discount rate. Using the time value of money concepts learned this semester, which payment option would you choose and why? show all work

Answer 1

The present Value annuity factor for 6% after 20 years is 11.4699.

The formulae to calculate present value would be:

Future Value *(Present value annuity factor)

Thus the present value of $261,553.70 to be received after 20 years if discounted at 6% would be:

$261,553.70 * 11.4699

2,999,995 which is almost equal to $3,000,000. In this case the present value of annuity factor is rounded to 4 digits.

Conclusion:

We can observe that present value of above specified almost the same as the amount it is offering now and thus both the options yeild same amount for investor and thus investor is indifferent regarding both choices.