Question

1. The winner of a state lottery is offered the following three options:
               i. Receive 10 million dollars now.
              ii. Receive 7 million dollars now and 7 million dollars in 10 years.
             iii. Receive 1 million dollars at the end of each year for the next 20 years.
   1. Use an interest rate of 4% per year compounded annually to determine the best option for the lottery winner.
   2. Use an interest rate of 8% per year compounded annually to determine the best option for the lottery commission.

Answer 1

Solution>

I have solved it in Excel. The formula used are written in the column along with the values. If you still have any doubt, kindly ask in the comment section.

Part a)

At 4%, the best option for lottery winner would be Option 3 as it gives the maximum Present Value of Cash Flows.

Part b)

At 8%, the best option for lottery commission would still be Option 3 as it gives the minimum Present Value of Cash Flows.

Note: Give it a thumbs up if it helps! Thanks in advance!