As the winning contestant in a television game show,you are considering the prizes to be awarded.You must indicate to the sponsor which of the following two choices you prefer,assuming you want to maximize your wealth.Assume it is now January 1,and there is no danger whatever that the sponsor won't pay off. Which one would you choose?

Question

As the winning contestant in a television game show,you are considering the prizes to be awarded.You must indicate to the sponsor which of the following two choices you prefer,assuming you want to maximize your wealth.Assume it is now January 1,and there is no danger whatever that the sponsor won't pay off.  Which one would you choose?

Quizplus · Accepted Answer

Choice 1 offers a lump sum payment of $1,000,000 immediately. This is the preferred choice as it offers the highest immediate wealth and there is no indication that the sponsor will not pay off. Choice 2 offers 20 annual payments of $75,000 each, resulting in a total payout of $1,500,000. However, the present value of this option is less than $1,000,000 due to the time value of money and the uncertainty of receiving future payments.

As the Winning Contestant in a Television Game Show,you Are