In: Finance
Assume you won the lottery. You have the option of receiving a one-time payment of $75,000 or 4 yearly payments of $20,000 starting right now. At an interest rate of 10%, which option do you prefer? Show your work.
For Comparison, we need to calculate Present Value of Yearly Payments
Year | Cash Flows ($) | 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.