A lottery prize is advertised as being $4,000,000 ($4 million). The winner recei

Question

A lottery prize is advertised as being $4,000,000 ($4 million). The winner receives $1 million immediately and then $500,000 (half a million dollars) at the beginning of each year for the next 6 years. Or the winner can elect to receive a single payment of $3,400,000 immediately. If the appropriate rate of interest for the winner is 5% should she choose the single payment or the series of payments over 6 years? Ignore taxes, and assume the decision is made strictly on financial grounds. The present value of the series of payments over 6 years is $. (Enter your response rounded to two decimal places.) Therefore, the winner should choose to take the series of payments the single payment

Explanation / Answer

You have to calculate the present value of the loettry prize if the cash is given into installments so that it can be compared with the lump sum amount that she can get instantly.

As you can see the present value of cash series of prize money is $3537846.034 which is more than $3400000 which she can get immediately.

Thus she should choose the series of payments.

Note: Kindly ask one question per post.

n=Year Cash Inflow PV at 5% = 1/((1+0.05)n) PV of cash inflow = Cash inflow * PV at 5% 0 1000000 1 1000000 1 500000 0.952380952 476190.4762 2 500000 0.907029478 453514.7392 3 500000 0.863837599 431918.7993 4 500000 0.822702475 411351.2374 5 500000 0.783526166 391763.0832 6 500000 0.746215397 373107.6983 PV os series = sum of PV of cash inflows 3537846.034

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