Question

You won a lottery and you have two options for receiving the money. You can receive a lump sum of $50,000 today or receive future payments of $8,000 every year for ten years (first payment will start in one year). The discount rate is 7%. Which option should you take and why?

Answer 1

Answer:

If there is no pressure for taking the money today the second option is a better deal: 56,188.65 to 50,000

Explanation:

We will check if the present value of the 10 years annuity of 8,000 discounted at 7% is better than 50,000 today:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 8,000 dollars

time 10 years

rate       7% = 7/100 = 0.07

$8000 \times \frac{1-(1+0.07)^{-10} }{0.07} = PV$

PV $56,188.6523