Question

What is the best selection for Amber from the following options? She has just won a lottery. She expects to earn 11% annually. Option 1 : She can elect to receive a lump sum today $63million Option 2 : She can elect to receive 10 end-of-year payments of $9.8 million Option 3 : She can elect to receive 30 end-of-year payments of $5.8 million.

Answer 1

She should be selecting that she is receiving the lump sum payment on today because it will mean that it will provide her with the best chance of maximizing return as lump sum payment is providing her with 63 millions and other payment options which are providing her with lesser than 63 millions after being discounted at the present value.

When there is a discounting of the the receipts of 10 equal payments of 9.8 Millions the overall return would be lesser than 63 millions and when there is a discounting of 30 payments of 5.8 millions it would also be lesser than lump sum payment received today, because the rate of discounting is too high, and it will help her to to earn a higher rate of interest by receiving the lump sum today.

She should be e intending to receive 63 Millions today and she should be reinvesting it with 11% annual rate of return so the overall income would be higher than other two income at the future value, and it will also help her to have a flexibility in switching off her investments when she wants to change her investment, according to different market rates.

So she should be choosing with the option( 1)SheShe can elect to receive a lump sum today of 63 million dollars