Question

Ana has won a lottery. she was offered two options to receive the award: she can either take it in five installments of $60,000 annually, starting from now; or she can take a lump-sum of $271,000 now. assuming (a) interest at an annual rate of 5% compounded annually, or (b) interest at an annual rate of 6% compounded continuously, which option should she choose under the consideration of cash value only?

Answer 1

She should choose to take a lump-sum of $271,000 now. This is the best option since the other option would have a present value less than $271,000. If you use the present value annuity calculator, you can get the present value of the installment option to be $259,768.60. Therefore, the the lump – sum payment option is the most appropriate.