Question

You are the lucky winner of the $30 million state lottery. You can take your prize money either as (a) 30 payments of $1 million per year (starting today), or (b) $15 million paid today. If the interest rate is 8%, which option should you take

Answer 1

I would take the option of receiving $15 million today.

Which option would  I take?

In order to determine which option I would choose, I would have to determine the present value of option A. Present value is the sum of discounted cash flows. I would choose the option that gives the higher present value.

Present value of option A = 1/(1.08) + 1/ (0.8^2) + 1/(1.08^3) + 1/(1.08^4) + ... 1/(1.08^30) = 11.25 million

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