You have just matched all of the winning numbers of the recent Mega Gillions drawing. The...

You have just matched all of the winning numbers of the recent Mega Gillions drawing. The jackpot was $100,000,000. Your choices are to receive your prize in equal annual installments of $5,000,000 over the next 20 years, or take a lump sum payment of $63,000,000 today. Leaving out the effect of taxes, and assuming a discount rate of 5% annually, which is the better option in terms of present value?

Expert Solution

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=5,000,000[1-(1.05)^-20]/0.05

=5,000,000*12.4622103

which is equal to

=$62,311,051.71(Approx)

Hence lump sum payment is better having higher present value.

jeff jeffy answered 2 years ago

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