Question

Congratulations, you just hit the lottery jackpot for one million dollars. You now have an option to receive $50,000 each year for 20 consecutive years, or you can receive $700,000 upfront on day one. Ignoring tax implications, what would you select, and why? How does current and future value of money enter into your calculations? How does inflation, and future cost of items factor into your calculations?

Answer 1

I would select receiving $700000 at the upfront and reallocating it for future years rather than receiving $50000 for 20 consecutive years due to time value of money as $700000 received today will have higher valuer in 20 years in used effectively and $50000 received for 20 consecutive years will be lesser than the $700000 today as it will be discounted at a specific rate at the present date.

Current value of the money at present will have higher impact than same amount at some specific future date because of factors like time value of money which includes Inflation .

Future value of money takes into the effect the compounding and it magnifies the overall amount.The compounded effect of money makes a sum of money at current value grow higher in future.

Inflation decreases the purchasing power of money so it reduces the cash flows to be received in future using a specific discounting rate .Inflation magnifies the value of money when the compounding is done.

Future cost of items also decreases the overall impact of money and magnify when the compouding is done.