You won the lottery! However, in order to receive your first prize, you need to

Question

You won the lottery! However, in order to receive your first prize, you need to choose among the following pay-out options. The APR is 20%, compounded semi-annually.

Option A: You will receive a payment of $0.05 immediately, which will then tripple each year for 27 years, starting in year 1 (t=1).

Option B: You will receive 101 payments starting in year 6 (t=6), paid out semiannually of $195,000 each.

Option C: You will receive $750,000 in year 1 (t=1), and each following year you receive half the amount from the year before, forever. Using your time value of money tools, calculate the present value for each of these options and indicate which one you would select

Explanation / Answer

Present value of option A=0.05*(1-(3/1.1^2)^27)/(1-(3/1.1^2))=1499585466

Present value of option B=(195000/1.1^12)*(1-(1/1.1)^101)/(1-1/1.1)=683418

Present value of option C=(750000/1.1^2)/(1-0.5/1.1^2)=1056338

Select Option A

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