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5. Which lottery payout scheme is better? Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum payout, you get $2,750 today. If you pick the payments over time payout, you get three payments: $1,000 today, $1,000 one year from today, and $1,000 two years from today.

Respuesta :

Parrain

Answer: PAYMENTS OVER TIME

Explanation:

To know the better option we would have to compute the Present Value of the Payments overtime payouts. That way we can equate it to the lump sum today.

To calculate the Present Value we will discount at the interest /discount rate of 6% except for the payment today which should not be discounted as this is the present.

= 1000 + 1000/(1+0.06) + 1000 / (1+0.06)^2

= 1000 + 943.396226415 + 889.996440014

= 2833.39266643

=$2,833.39

The PV of the Payments overtime Option is higher than the lump sum payment today therefore winner would be better off accepting the PAYMENTS OVER TIME.

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