Your plans for the future have finally materialized because you have w

Your plans for the future have finally materialized because you have won the lottery.

Congratulations! The lottery marketing material says you have won $20,000,000 but a more careful examination of the terms and conditions means that you have won twenty $1,000,000 beginning-of-the-year cash flows with the first cash flow today. Further, the lottery contract says that instead of waiting for so many years to collect your winnings, you could accept a lump sum check today in the amount of $12,000,000. If you determine that the appropriate interest rate to compare these two alternatives is 6%, which alternative is preferred? To answer this question, solve for the present value of each alternative and make your decision based strictly on the values. You may ignore taxes in your decision

ANSWER

PV of the annuity is $12,158,116.45 and is therefore the preferred choice.