Fill in the blank 1 options: lump sum/payments over time 3. Which lottery payout

Question

Fill in the blank 1 options: lump sum/payments over time

3. Which lottery payout scheme is better? Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum, you get $2,750 today. If you pick payments over time, you get three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today At an interest rate of 6% per year, the winner would be better off accepting the , since it has the greater present value. At an interest rate of 10% per year, the winner would be better off accepting value. since it has the greater present Years after you win the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the same payout schemes. She must make a quick decision about whether to collect her money under the lump sum or the payments over time. What is the best advice to give your friend? O The lump sum is always better O The payments over time are always better. O It will depend on the interest rate; advise her to get a calculator. None of these answers is good advice.

Explanation / Answer

1.Present value at 7% = 1000 + 1000/(1.07) + 1000/(1.07)^2 = 2808.69

So 2808.69 > 2750

So he accepts series of Payments .

2.

Present value at 10% = 1000 + 1000/(1.1) + 1000/(1.1)^2 = 2735.54

So 2735.54 < 2750

So he accepts Lump sum amount

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