A lottery offers the winner a choice between a 20 year annuity of $50,000 starting a year from now and a lump sum of half a million dollars payable today. If the current interest rate is 10%, the winner is better off to take:

Question

Quizplus · Accepted Answer

To compare the options, we need to calculate the present value of the annuity and the future value of the lump sum. Using the formula for present value of an annuity, we find that the present value of the annuity is approximately $634,894. Using the formula for future value of a lump sum, we find that the future value of the lump sum is $1,048,576. Since the lump sum has a larger future value and a larger present value than the annuity, the winner is better off taking the lump sum.

A Lottery Offers the Winner a Choice Between a 20