You win a small lottery and have the choice of two ways to be paid: You can acce

Question

You win a small lottery and have the choice of two ways to be paid: You can accept the money m a lump turn (Payout Scheme X) or m a series of payments over time (Payout Scheme y). If you pick Payout Scheme X, you get $2,750 today. If you pick Payout Scheme Y, you get three payments: $1,000 today, $1,000 one year from today, and $1,000 two years from today. At an interest rate of 10% per year, the winner would be better off accepting Payout Scheme _______, since it has the greater present value. At an interest rate of 8% per year, the winner would be better off accepting Payout Scheme __________, since it has the greater present value. Years after you with the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the same payout schemes. She must make a quick decision about whether to collect her money under Payout Scheme X or Payout Scheme Y. What is the best advice to give your friend? Payout Scheme x is always better. Payout Scheme Y is always better. It will depend on the interest rate; advise her to get a calculator. None of these answers is good advice.

Explanation / Answer

1- x 2- y 3- it will depend on the interest rate.

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