Congratulations, you just won the lottery. Now you must decide between two alternatives to receive your...

Congratulations, you just won the lottery. Now you must decide between two alternatives to receive your winnings. The first option is to take the lump sum amount offered today. The second option is to accept a series of equal payments over the next 20 years. Explain how you would set up your calculations that would allow you to select the best alternative .

Expert Solution

I would choose with the receiving with the lump sum amount today because that will involve the time value of money concept as the value received today would be greater than the same value received in future.

time value of money is an inherent concept in the world of finance which states that the same value of money received today would be higher valued than the same amount of money received tomorrow, because there is a time value of money concept.

The value of money decreases with time because there are a lot of factors like inflation and rate of interest which will decrease the purchasing power of the money and hence this will lead to the value of money going down.

so through the application of time value of money concept, I would look for acceptance of the lump sum of money today and I would not be accepting the installment method and one more benefits associated with receiving lump sum amount today is that I can reinvest that money and gain better returns in the future.

jeff jeffy answered 1 year ago

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