Question

A $600,000 state lottery prize is spread evenly over twelve years ($50,000 a year) (Alternative 1), or you may take a lump distribution of $452,000 (Alternative 2). If you can earn 8 percent, calculate the present values of both alternatives. Use Appendix D to answer the question. Round your answers to the nearest dollar.

Answer 1

Answer and Explanation:

The computation of the present values of both alternatives is shown below:

For alternative one, the lump sum amount is

= Yearly payment × PVIFA factor at 8% for 12 years

= $50,000 × 7.5361

= $376,805

And, in the alternative 2, the lumpsum amount i.e. present value is $452,000

So as we can see that the alternative 2 is better as the lumspsum amount is high as compared with the alternative 1