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

The principle of time value of money states that money today is worth more than the same amount of money in the future due to the potential to earn interest or investment returns. By taking the $20 million today, you have the opportunity to invest it and potentially earn returns on it, which would make it worth more than receiving equal installments of $1 million per year for 20 years. Additionally, inflation may decrease the purchasing power of future installments. Therefore, taking the $20 million today is the better choice.

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