Question

Suppose you win the lottery and have two options: A. Take $1 million now. B. Take $1.2 million to be paid out as 300,000 now and then $300,000 a year for 3 years. Which is the better deal? Assume that the interest rate is 10%. Please show your work. (4 point)

Answer 1

Answer:

A. Take $1 million now.

Explanation:

A. If we take $1 million now the present value of the money is $1 million.

B. If we choose to take $1.2 million paid out over 3 years then present value will at 10% will be;

$300,000 + $300,000 / 1.2 + $300,000/ 1.44 + $300,000 / 1.728

$300,000 + $250,000 + $208,000+ $173,611 = $931,944

The present value of option B is less than present value of option A. We should select option A and take $1 million now.