Question

You are considering two different payment plans for the lottery you just won. Option 1 pays $10,000 today and Option B pays $20,000 at the end of ten years. Assume you can earn 6.5 percent on your savings. Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different..

Answer 1

I	Option:A : Receive $10,000 Today
	Future Value of $ 10,000 after 10 Years = $ 10,000 * (1+0.065)^10
	Future Value of $ 10,000 after 10 Years = $ 10,000 * (1.065)^10
	Future Value of $ 10,000 after 10 Years = $ 10,000 * 1.8771
	Future Value of $ 10,000 after 10 Years = $ 18,771
	Option:B : Receive $20,000 after 10 Years
	By Comparing Amount under both the Options after 10 Years, It is better to Opt Option B as the Future Value is higher.
II	Option:A : Receive $10,000 Today
	Option:B : Receive $20,000 after 10 Years
	Present Value of $20,000 received after 10 Years = $ 20,000/(1+0.065)^10
	Present Value of $20,000 received after 10 Years = $ 20,000/1.8771
	Present Value of $20,000 received after 10 Years = $ 10,654.52
	By Comparing Amount under both the Options, It is better to Opt Option B as the Present Value is higher.

The answer under both the Options remain same, as the amounts under both the options either increases in case of future value orelse discounts incase of present value at same 6.5% Interest rate. Both the alternatives give the same answer.