You enter to play the lottery. To your surprise, you've won! You are given the option...

You enter to play the lottery. To your surprise, you've won! You are given the option to accept either a lump-sum payment of $105 million today or annual life-time payments of $3,582,000 beginning today. Assuming current rates of interest are at 3.25% which is the better decision. Be sure to discuss all the aspects and assumptions in making your decision and any calculations you have made to support that decision. How old would you have to live to be indifferent between the two choices?

Solutions

Expert Solution

If the age of the person is assumed to be 20 years old today with his/her lifespan being 90. Then the number of additional years to receive the payment is 70 years ( 90 -20) . Is such case, the PV of lifetime payment is $ 98,468,086 which is less than $ 105 Million . So in this case it is better to accept the lumpsum payment today.

To be Indifferent

To be indifferent between the two options , the person will have to live another 95 years, ie upto age of 95+20 = 115 years. As this option is very unlikely with low probability, the option of lumpsum payment is the best one considering the interest rate of 3.25%.

Formulae

jeff jeffy answered 1 year ago

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