Pat won a lottery with two options: $1 million per year, at the beginning of the year, for 25 years or a single cash price of $18 million. If low-risk investments can earn 2.5% compounded annually, which option should Pat choose and what is the advantage in terms of current economic value?
A) Lump sum has an advantage of $885 000
B) 25 year annuity has an advantage of $885 000
C) 25 year annuity has an advantage of $424 000
D) Lump sum has an advantage of $424 000
E) Both options are the same

Question

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The Answer of Pat won a lottery with two options: $1 million per year, at the beginning of the year, for 25 years or a single cash price of $18 million. If low-risk investments can earn 2.5% compounded annually, which option should Pat choose and what is the advantage in terms of current economic value?
A) Lump sum has an advantage of $885 000
B) 25 year annuity has an advantage of $885 000
C) 25 year annuity has an advantage of $424 000
D) Lump sum has an advantage of $424 000
E) Both options are the same

Pat Won a Lottery with Two Options: $1 Million Per