Penny just won the state lottery that offers a choice of payments. She may opt f

Question

Penny just won the state lottery that offers a choice of payments. She may opt for either receiving $1,000,000 today or $2,000,000 at the end of ten years. If she can invest her funds at 5% annually, which is the better choice? A. The later payment since $1,000,000 invested at 5% for ten years will be worth $1,500,000. B. The immediate payment since the present value of the $2,000,000 payments is $1, 200,000. C. The earlier payment since the present value of the $2,000,000 payments is $876,000. D. The earlier payment since the future value of $1,000,000 in ten years is $1,628,894. E. The later payment since the present value of the $2,000,000 payment is $1, 227,927.

Explanation / Answer

Solution.

Option D is the best.

The earlier payment since the future value of $1,000,000 in ten year is $1,628,854.

Future value of $1,000,000 at the rate of 5% in ten year will be $1,628,894.

= $1,000,000 x 1.6288 = $1,628,894.

While PV of future payment $2,000,000 at the rate of 5% over ten year is

= $2,000,000 x 0.61391325 = $1,227,826.50

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