Question

If your friend won the state lottery and have to make a choice for collecting. Should they collect all 1,000,000 or accept 4 years payment of 250,000. ( Earning 6% on investments). Should That friend collect in whole instead? If so, why should that friend collect it in whole instead of 4 payments?

Answer 1

PV of 4 Years CFs:

Year	CF	PVF @6%	Disc CF
1	$ 2,50,000.00	0.9434	$ 2,35,849.06
2	$ 2,50,000.00	0.8900	$ 2,22,499.11
3	$ 2,50,000.00	0.8396	$ 2,09,904.82
4	$ 2,50,000.00	0.7921	$ 1,98,023.42
PV of CFs			$ 8,66,276.40

The Today's Value of 250000 each year recived for 4 years is 866276.40.

Thus select 1000000 today itself.