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Dan is the winner of a $1 Million state Lottery. He is given the choice between...

Dan is the winner of a $1 Million state Lottery. He is given the choice between $100,000 a year for ten years and $700,000 in cash. The annuity payment starts today. If the interest rate is 12 percent, which would Dan prefer?

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Answer #1

Choice 1  - $100,000 a year for 10 years,

Annuity payments = $100,000 which begins today

Present value = $100,000 + [$100,000 / (1.12)1] + [$100,000 / (1.12)2] + [$100,000 / (1.12)3] + [$100,000 / (1.12)4] + [$100,000 / (1.12)5] + [$100,000 / (1.12)6] + [$100,000 / (1.12)7] + [$100,000 / (1.12)8] + [$100,000 / (1.12)9]

Present value = $100,000 * 6.32825 or

Present value = $632,825

Choice 2: Receive $700,000 cash.

conclusion.

It is preferable to choose $700,000 rather than receiving $100,000 annuity payments for 10 years. because $700,000 is greater value than present value of Annuity payments worth $632,825.

Dan would prefer $700,000

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