It is a common fact that many lottery winners are “broke” sooner than later. If you...

It is a common fact that many lottery winners are “broke” sooner than later. If you won a $1,000,000 lottery, would you want to collect the lump sum winnings today or receive the monies over time? How does your decision influence the ultimate amount of cash you will collect? Explain the TVM factors you would consider as you make this decision.

Expert Solution

For deciding whether to collect lumpsum winning today or collect monies over time,we need to calculate present value of each alternative.

The alternative which will have higher present value ,that alternative should be chosen and that alternative will provide us more cash .

Now if we receive lumpsum amount today then present value of that will be equal to that amount itself

Now if we receive monies over time then present value of that alternative

=Amount received in each year multiplied by present value annuity factor

Where PV annuity factor is present value factor at rate ,r and periods,n.

We have formula also to calculate present value of monies received each year which is also called present value of ordinary annuity which is given by-

jeff jeffy answered 2 years ago

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