Question

You win the lottery and are given the option of receiving $250,000 now or an annuity...

You win the lottery and are given the option of receiving $250,000 now or an annuity of $25,000 at the end of each year for 30 years. Which of the following is correct?

a. If you know the interest rate, you can calculate the present value of each option, and pick the one with the lower present value

b. You will always choose the annuity

c. You will choose the lump sum payment if the interest rate is 7%, compounded annually

d. none of the above is correct.

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Homework Answers

Answer #1

Option 1:-

Receive $250,000 now.

Option 2:-

Annuity of $25,000 at the end of each year for 30 years.

Taking 7% compounded annually.

Calculating the Present Value of annuity:-

Where, C= Periodic Annuity = $25,000

r = Periodic Interest rate = 0.07

n= no of periods = 30

Present Value = $310,226.03

So, Present Value of Option 2 is higher at Interest rate 7%. Thus, Option C is incorrect.

- Hence, Option A is correct as Providing an Intrerest rate, you can calculate the Present value and pick the best Options.

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