This is your lucky day! You just learned that you purchased a winning lottery ti

Question

This is your lucky day! You just learned that you purchased a winning lottery ticket. When you called the lottery commission, you were told that you have a choice: you (or your heirs, should you be unfortunate enough to expire in the interim) can elect to receive $500,000 at the beginning of each year for the next 20 years, or you can choose to receive a lump sum payment of $6,000,000 immediately. You believe that your opportunity cost (the rate of return you could earn on any money that you invest) is about 5% per year. Ignoring any tax considerations, which option should you choose?

Explanation / Answer

Year Amount 01-20 $100,00,000 Lump sum payment $60,00,000 Interest rate 5% p.a. Amount after 20 years $120,00,000 Lump sum payment option gives more revenue than $ 500000 payment yearly.

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