Judy Bright has just won the lottery.She can elect to receive her winnings in equal payments of $200,000 a year for the next ten years on December 31 or to receive $2,000,000 immediately.If the current interest rate is 6%,which choice will provide the highest amount? Use Table PV-2.
A)Receiving $2,000,000 immediately.
B)Taking equal payments for 10 years.
C)It does not matter since either choice provides the same amount.
D)Refusing to accept the winnings since it is not enough.

Question

Judy Bright has just won the lottery.She can elect to receive her winnings in equal payments of $200,000 a year for the next ten years on December 31 or to receive $2,000,000 immediately.If the current interest rate is 6%,which choice will provide the highest amount? Use Table PV-2. 
A)Receiving $2,000,000 immediately. 
B)Taking equal payments for 10 years. 
C)It does not matter since either choice provides the same amount. 
D)Refusing to accept the winnings since it is not enough.

Quizplus · Accepted Answer

Using the present value table (PV-2), we can calculate the present value of the equal payments of $200,000 a year for 10 years as follows:

PV = $200,000 x 7.360 (from the table)
PV = $1,472,000

So, Judy would receive a total of $1,472,000 over the 10 years if she chose the equal payments option.

Now, let's calculate the present value of the lump sum payment of $2,000,000 using the same interest rate of 6%:

PV = $2,000,000 ÷ 1.06^0
PV = $2,000,000

Therefore, if Judy chooses to receive the lump sum payment, she would receive $2,000,000 immediately, which is higher than the present value of the equal payments option.

Thus, the best choice is to receive $2,000,000 immediately.

Judy Bright Has Just Won the Lottery