Question

Despite your better judgment you bought a ticket in the first ever “IU Northwest Alumni Lottery” game . . . and you won! You now need to decide which payout option to take: a) an immediate lump sum of $160,000; b) $1,000 per month to be received at the end of this month and every month thereafter for 50 years in total; or, c) $10,000 to be received one year from now and every year thereafter forever.

Assuming an annual discount rate of 7.5%, which payout option should you take based on a comparison of the present value of each of the 3 payout options?

[NOTE: You must show your work for each of the 3 options to receive points]

Answer 1