You won the lottery and can receive either (1)$60,000 today,or (2)$10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today.You plan to use the money to pay for your child's college education in 15 years.You should
A) take the $60,000 today because of the time value of money regardless of current interest rates.
B) take option two because you get $70,000 rather than $60,000 regardless of current interest rates.
C) take the $60,000 today only if the current interest rate is at least 16.67%.
D) take the $60,000 today if you can earn 6.81% per year or more on your investments.

Question

Quizplus · Accepted Answer

The best choice is to take the $60,000 today if you can earn 6.81% per year or more on your investments. This is because if you invest the $60,000 today at a rate of 6.81% per year, it will grow to $133,809.06 in 15 years, which is more than the $70,000 you would receive from option two. However, if you cannot earn at least 6.81% per year on your investments, it would be better to take option two, as it guarantees a total of $70,000 regardless of the interest rate.

You Won the Lottery and Can Receive Either (1)$60,000 Today,or