Question

If you win the lottery and can choose $10,000 today or $2,000 at the end of each year for 6 years, which would you choose? Consider only the value of the options in your analysis Use an interest rate of 6%.

a. Take the 2,000 for 6 years b/c it is worth 12,000 in today's dollars

b. None of the choices are correct

c. Take the 10,000 today because it is worth more than 2,000 spread over 6 years

d. Take the 2,000 for 6 years because it is worth 10,484 in todays dollars

e. Take the 2,000 for 6 years because it is worth 10,316 in todays dollars

Answer 1

The option (C) Take the 10,000 today because it is worth more than 2,000 spread over 6 years is choosen due to the following reason.

The Present Value of 2000 at the end of each year is calculated as follows,

Year	Amount	PV@6%	Amount * PV@6%
1	2000	0.943	1,886.79
2	2000	0.890	1,779.99
3	2000	0.840	1,679.24
4	2000	0.792	1,584.19
5	2000	0.747	1,494.52
6	2000	0.705	1,409.92
	12000	Present Value	9,834.65

The present value of 2000 received at the end of 6 years would come to 9834.65. Thus it is better to accept $10,000 today.