Answer to Question #167602 in Finance for Puujee

Question

Value of an annuity versus a single amount Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (that is, $1,000,000 over 25 years) or as a single amount of $500,000 paid immediately.

a. If you expect to be able to earn 5% annually on your investments over the next 25 years, ignoring taxes and other considerations, which alternative should you take? Why?

Answer 1

a)

Prize of 40,000 should be taken per month rather than the lump sum of 500,000 because PV of prize money is 563757.78 which is higher than the lump sum amount of 500,000