Jerry has just won the grand prize in the Power-ball lottery. Jerry has the opti

Question

Jerry has just won the grand prize in the Power-ball lottery. Jerry has the option of receiving $30,000,000 immediately or receiving 4,000,000 each year for ten years at which time he will receive a lump sum of $10,000,000. Assuming you are Jerry's financial advisor and that you can invest money at a 10 percent rate of return, which option will you suggest he choose?

Option 1: Take the $30,000 NOW.

Option 2: Take $4,000 each year for 10 years to include a lump sum of $10,000 in year 10.

What is the Present Value of each option? The option with the maximum Present Value is the option we should choose.

Option 1: The PV of $30,000 received NOW is $30,000 since the PV factor is 1.0000.

Option 2: What is the PV of the ANNUITY payments plus the PV of the LUMP SUM payment?

Explanation / Answer

Option 1: Take the $30,000 NOW.

Option 2: Take $4,000 each year for 10 years to include a lump sum of $10,000 in year 10.

What is the Present Value of each option? The option with the maximum Present Value is the option we should choose.

Option 1: The PV of $30,000 received NOW is $30,000 since the PV factor is 1.0000.

Option 2: What is the PV of the ANNUITY payments plus the PV of the LUMP SUM payment?

PV = 4000 PVIFA(10%,10) + 10000 PVIF(10%,10) = $28433.70

Therefore, he should choose Option 1 which will give maximum present Value

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