The lottery has a choice of two different prize payouts.One is to receive a lump sum now; the second is to receive an annual payment of $25,000 a year for the next 40 years starting in one year.If interest rates are 5% the amount of the lump sum that would make you indifferent to the two prizes is closest to?

Question

Quizplus · Accepted Answer

The lump sum should be the present value of the annuity of $25,000 for 40 years at a 5% interest rate. Using the present value of annuity formula, the calculation gives approximately $428,977.

The Lottery Has a Choice of Two Different Prize Payouts