Question

In: Finance

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.

Solutions

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.


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