Assume that you won the Lotta Dough Lotto jackpot for $20 million.Further assume that you were offered a choice to receive the $20 million today,or receive it in equal installments of $1 million per year for 20 years.According to one of the principles of finance,which would you take?
A) the $20 million in equal installments of $1 million per year for 20 years because you would be afraid of spending it all right away
B) the $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years
C) You would be indifferent as to when you would receive the $20 million since the total number of dollars received is the same either way.
D) the $20 million in equal installments of $1 million per year for 20 years because it would be worth more than if you would receive it today

Question

Quizplus · Accepted Answer

This is because of the time value of money principle, which states that a dollar today is worth more than a dollar tomorrow due to the potential earning of interest on the dollar today. By taking the lump sum today, you could invest it and earn a return on investment, whereas if you took installment payments, you would not be able to earn as much interest. Additionally, receiving the money now would eliminate the risk of inflation devaluing the future payments. Therefore, taking the $20 million today would be the best choice.

Assume That You Won the Lotta Dough Lotto Jackpot for $20