Question

You have just matched all of the numbers in the Mega Zillions lottery. The Jackpot was $62,000,000. Your choices are to take your prize in equal annual installments over the next 30 years, or to receive an immediate check for $20,000,000. Assuming a discount rate of 9.7%, and ignoring the effect of taxes, which option is financially optimal?

A. Installments

B. Immediate check

C. The two options are worth exactly the same amount

D. Insufficient data to make a determination

Answer 1

The choice of receiving the equal installments in future or lump sum at present is determined on the based in calculation of present value of both the methods.

1. Installment method= (6200000/30)= 206666.66

Net present value of 2,06,666.66 for 30 years at 9.7 percent discounting rate(It us assumed that installment are received nat the end of the year) = 1998058.56

2. Receipt of immidiate payment= 20,00,000

So it is better to accept immediate payment as it will give more present value as well it will provide with time on hands so other decision can be made.

So (B) Immediate check will be the appropriate answer.