You just won the lottery.You have a choice of three different prize options.
Option #1: receive $1,200 immediately
Option #2: receive $1,500 a year from now
Option #3: receive $5,000 five years from now.
If the interest rate is 10% the ranking of the options,from the lowest present value to the highest is

Question

Quizplus · Accepted Answer

The present value of Option #1 is $1,200. The present value of Option #2 is $1,500 / (1 + 0.10) = $1,363.64. The present value of Option #3 is $5,000 / (1 + 0.10)^5 = $3,186.31. Therefore, the ranking of the options, from the lowest present value to the highest, is Option #1, Option #2, Option #3.

You Just Won the Lottery