2. You won the lottery and you can choose between two payout structures. The first pays...

 

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2. You won the lottery and you can choose between two payout structures. The first pays you $600,000 today. The second has payouts for 40 years. It pays you $25,000 per year for the first 10 years and then $55,000 for the next 30 years (the payments are at the beginning of the year). [20 Points] a. If the interest rate is 6%, which should you choose? b. Plot the difference in value between Option1 and Option2 as a function of interest rates where rates vary from 0 to 15% (increment by 1%). c. Briefly explain what the graph is saying and mention at what interest rates Optionl is preferred to 2. 2. You won the lottery and you can choose between two payout structures. The first pays you $600,000 today. The second has payouts for 40 years. It pays you $25,000 per year for the first 10 years and then $55,000 for the next 30 years (the payments are at the beginning of the year). [20 Points] a. If the interest rate is 6%, which should you choose? b. Plot the difference in value between Option1 and Option2 as a function of interest rates where rates vary from 0 to 15% (increment by 1%). c. Briefly explain what the graph is saying and mention at what interest rates Optionl is preferred to 2.

Answer rating: 100% (QA)

a To determine which payout structure to choose we need to compare the present value of the two opti... View the full answer