Assume you won the lottery. You have the option of receiving a one-time payment of $75,000...

Assume you won the lottery. You have the option of receiving a one-time payment of $75,000 or 4 yearly payments of $20,000 starting right now. At an interest rate of 10%, which option do you prefer? Show your work.

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Expert Solution

For Comparison, we need to calculate Present Value of Yearly Payments

Year	Cash Flows ($)	PV Factor @10%	PV of Cash Flows
0	20,000.00	1	20,000.00
1	20,000.00	0.9091	18,181.82
2	20,000.00	0.8264	16,528.93
3	20,000.00	0.7513	15,026.30
Present Value of Yearly Payments	69,737.04

Since, One Time Payment is greater than four yearly payments i.e, $75,000 > $69,737.04

Therefore opting first option is correct i.e, choosing One Time Payment of $75,000.

jeff jeffy answered 1 year ago

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