Question

Many American families play the lottery. Winning the lottery offers an easy path to financial security. But for most that play, this dream remains unrealized, deferred, always just out of reach. But imagine you win a major lottery prize. The choice is $500,000 cash today or $50,000 a year paid over 25 years. Find the present value of the $50,000 cash payment stream and compare it to the $500,000 lump sum... forget the taxes for now... this will compare the values in the same time period = = REMEMBER Time Value of Money - or - calculate the future value of the $500,000.... and compare it with the future value of the $50,000 payments. 3% intereste rate

Answer 1

PRESENT VALUE METHOD:
PV of the 25 instalments = 50000*PVIFA(3,25) = 50000*17.4131 =	$        870,655
As the PV of the deferred payment is more, it is preferred.
FUTURE VALUE METHOD:
FV of the lump sum = 500000*1.03^25 =	$     1,046,889
FV of the deferred payment = 50000*FVIFA(3,25) =50000*36.4593 =	$     1,822,965
As the FV of the deferred payment is more, it should be preferred.