Question

Q1/ you just won the lottery. Now you must decide between two alternatives to receive your winnings. The first option is to take the lump sum amount offered today. The second option is to accept a series of equal payments over the next 20 years. Explain how you would set up your calculations that would allow you to select the best alternative.?

Answer 1

Lump sum payment would be invested in other assets classes which would generate further cash inflows in the form of Interest/Dividends which could further be re-invested for further earnings in the form of Interest/Dividends whereas the a series of equal payments over the next 20 years would have discounted values. As we know the time value of money principle where the future cash flows are discounted so these cash flows will have discounted values which would result in overall discounted price to be received. Higher the Interest rate, higher would be discounting and more will be the losses.