You have won the Florida state lottery. Lottery officials offer you the choice o

Question

You have won the Florida state lottery. Lottery officials offer you the choice of the following alternative payments.

Alternative 1: $10,000 one year from now.

Alternative 2: $20,000 five years from now.

Alternative 3: $5,000 each year for 4 years. Which should you choose if the interest rate is 10%?.

(4)        What is the value of an investment that pays $100 every year forever with the first cash flow occurring in one year? What would the value be if the first cash flow occurs in two years? The discount rate is 16% per year.

Explanation / Answer

3). Alternative 1(PV) = $9,090.91

Alternative 2 (PV): $12,418.43

Alternative 3 (PV): $15,849.33

Choose alternative 3 as it has higher value.

4).

PV ($100 every year ) = $100 / 0.16 = $625

PV ( occurs in two years ) = $100/0.16 /(1.16) = $538.79

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