A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years.The winner calculates the internal rate of return (IRR)of taking the money at the end of each year and,estimating that the discount rate across this period will be 6%,decides to take the money at the end of each year.Was her decision correct?

Question

Quizplus · Accepted Answer

The correct decision is to choose the option that results in the highest net present value (NPV) based on the given discount rate. In this case, the lottery winner calculated the internal rate of return (IRR) of taking the money at the end of each year based on an estimated discount rate of 6%, and it was higher than the interest rate offered by taking the $6 million upfront. Therefore, taking the money at the end of each year results in a higher NPV and is the correct decision, which agrees with the Net Present Value rule. The payback rule is not relevant in this case, as it only considers the time it takes to recover the initial investment and not the total value of the investment.

A Lottery Winner Can Take $6 Million Now or Be