You will buy a lottery ticket.If you win,you have a choice of receiving $995,000 now or three equal end-of-year payments of $400,000.You should take the payments
A)because $1,200,000 is greater than $995,000.
B)if you earn 20% or more on your investments.
C)if you earn 11% or more on your investments.
D)if you earn less than 10% on your investments.

Question

Quizplus · Accepted Answer

The correct choice is to take the payments if you earn less than 10% on your investments. This is because the present value of the three payments, when discounted at a rate higher than 10%, would be less than $995,000, making the lump sum more valuable. Conversely, if your investment return is less than 10%, the present value of the payments would be higher than the lump sum, making the payments the better choice.

You Will Buy a Lottery Ticket