Question

Assume that you have just won a state award. Your prize can be taken either in the form of RM1 million at the end of each of the next 20 years (that is, RM 20,000,000 over 20 years) or a single amount of RM10 million paid immediately. If you expect to earn 10% annually on your investments over the next 20 years, ignoring taxes and other considerations, which alternative should you take? Why?

Answer 1

Given below are the option available for lottery,

Option 1). RM1000000 at the end of each of the next 20 years.

Option 2). RM10000000 immediately

if annual rate of investment r = 10%

we can compare both the options by calculating present worth of option 1 using annuity formula

So, present value of option 1 = PMT*(1 - (1+r)^(-t))/r = 1000000*(1 - 1.1^-20)/0.10 = RM8513563.72

Since present worth of option A is less than as compare to present worth of option 2, alternative second of taking RM10000000 immediately should be selected.