You win the lottery. You can either have $850,000 right now, or $1,000,000 paid in annual...
You win the lottery. You can either have $850,000 right now, or $1,000,000 paid in annual installments of $200,000 starting next year. If the interest rate is 6%(0.06), which will you choose? Why? What if the interest rate is 4%(0.04)? Explain.
Homework Answers
When I = 6%
Present value of installment payment = 200000 * (P/A, 6%,5)
= 200000 * 4.212364
= 842472.76
Present value of second option = 850000
As the present value of getting payment now is more, it should be selected
When I = 4%
Present value of installment payment = 200000 * (P/A, 4%,5)
= 200000 * 4.451822
= 890364.47
Present value of second option = 850000
As the present value of getting payment in installments is more, it should be selected
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