Answer to Question #201089 in Finance for Mariam islam

Question #201089

You just won the Florida lottery. To receive your winnings, you must select one of the two following choices: 

i. You can receive $1,000,000 a year at the end of each of the next 30 years; 

 ii. You can receive a one-time payment of $15,000,000 today. Assume that the current interest rate is 6%. Which option is most valuable?   

Expert's answer

While evaluating two financial options, we must take into consideration the importance of present value (PV). The present value of any investment opportunity is the sum total of all future cash flows discounted at an appropriate interest rate after deducting the initial outlay (if any) from it.

The calculation of PV of winnings in both the options given in the above-mentioned question is shown as follows-

It will give the following output-

Since the PV of winnings is higher in option 2, we should receive a one-time payment of $15,000,000 today.

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