Question

The lottery is a great example of the Time Value of Money. Select a current lottery and determine whether you would take a lump sum payment or the yearly payments. Discuss and support your decision with the theories and calculations from concept 7 materials (FV, PV, Interest Rates).

Answer 1

Lottery amount $50000000.
Suppose you have to decide between receiving the lump-sum
amount today or receiving it in installments of $5000000 over the next 10 years.
The interest rate is 8%.
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 8% and t is the time period in years.
total present value = sum of present values of future cash flows
t	1	2	3	4	5	6	7	8	9	10
future cash flows	5000000	5000000	5000000	5000000	5000000	5000000	5000000	5000000	5000000	5000000
present value	4629630	4286694	3969161	3675149	3402916	3150848	2917452	2701344	2501245	2315967
total present value	33550407
The lump sum amount ($50000000) is greater than the total present value ($33550407) of future installments
in the amount of $5000000 for the next 10 years.
You would take the lump-sum payment.