Question

Q. You friend won the lottery and two payout options. Option A allows them to receive $1,000,000 today while option B will pay them $4,000,000 in 20 years. Which option would you recommend to your friend if the interest rate is 4.75% compounded annually? Round to the nearest 0.01.

-A- Indifferent between Option A and Option B

-B- Option A

-C- Option B

Answer 1

Option A : Receive $ 1000000 today

Option B : Receive $4,000,000 in 20 years

Present Value:
PV = FV / (1+r)^n
Where r is Int rate per period = 4.75 % or 0.0475
n - No. of periods = 20 years

Particulars	Amount
Future Value	$      4,000,000.00
Int Rate	4.7500%
Periods	20

Present Value = Future Value / ( 1 + r )^n
= $ 4000000 / ( 1 + 0.0475 ) ^ 20
= $ 4000000 / ( 1.0475 ) ^ 20
= $ 4000000 / 2.5298
= $ 1581172.89
the present value of the to be Received $4,000,000 in 20 years is $ 1581172.89

if he choose Option B additionally he can receive $ 581172.89 ($ 1581172.89 - $1000000)

- C - Option B is correct answer

please comment if any further assistance is required