You win the $20 million state lottery, and you have a choice of taking

You win the $20 million state lottery, and you have a choice of taking an amount of money per year for the next 20 years or a flat payment now. The flat payment that the state offers you is $9.82 million.

a. What discount rate is the state using?
b. Should you take the money or the annuity?

ANSWER

a. 8% (This is essentially the internal rate of return on the project.)
b. In general, it depends on what return you think you can get on the money. If you think you can do better than 8%, you’re better off with the cash.