You have just won the state lottery and have two choices for collectin
QUESTION
You have just won the state lottery and have two choices for collecting your winning. You can collect $50,000 today or receive $10,100 per year for the next seven years. A financial analysts has told you that you can earn 10% on your investments. Which alternative should you select and why?
Solution: Option 1: Present Value of Amount = $50000 Option 2: Annual Amount = $10100 Time Period = 7 Years Interest Rate = 10% Present Value of Annuity = Annual Cash Flow*((1-1/(1+r)^n)/r)
= $10100*((1-1/(1+10%)^7)/10%) = $49171 Option 1 value is more than the Option 2 value. Therefore, Option 1 should be selected.
ANSWER:
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