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Why would you prefer to keep the amount you could spend on the lottery rather than...

Why would you prefer to keep the amount you could spend on the lottery rather than possibly doubt the amount through the draw? Topic: Time Value of Money: Valuing Cash Flow Streams Book: Fundamentals of Corporate Finance (3rd ed)

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Answer #1

Amount through the draw is uncertain. However, keeping an amount with one self and investing in risk free rate is a secured investment.

Suppose a person has $100.

If buy a lottery where probability to win is 5% and if he win get %1000, then his expected return will be 1000*5% + 0*95% = 50

If he invest in risk free rate of 5%, then his expected return for an year will be 100*(1+5%)= %105

Clearly, the risk is very less in keeping the money and investing.

Since money has got time value, investing is the best option. This will reduce the chances of reducing purchasing power.

If you have any doubt, ask me in the comment section please.

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