Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (i.e., $1 million over 25 years) or as a lump sum of $500,000 paid immediately
a. If you expect to be able to earn 5% annually on your investments over the next 25 years, which alternative should you take? Why?
b. Would your decision in part (a) be altered if you could earn 7% rather than5 % on your investments over the next 25 years? Why?
c. At approximately what interest rate would you be indifferent when choosing between the two plans?

  • CreatedMarch 26, 2015
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