You win the Mightyball lottery, which promises a $1 million payout - yippee! But, there's a...

 

Transcribed Image Text:

You win the Mightyball lottery, which promises a "$1 million" payout - yippee! But, there's a catch - your winnings will be paid as an annuity at a rate of $50,000 per year for 20 years, with the first payment beginning immediately. Alternatively, you may elect to receive an immediate lump-sum payout of $650,000. If the appropriate interest rate is 4.75% (compounded annually), which alternative should you select, and why? The annuity alternative, because its PV of $1,000,000 is greater than the $650,000 PV of the lump-sum alternative. The lump-sum alternative, because its PV of $650,000 is greater than the $636,533 PV of the annuity alternative. The annuity alternative, because its PV of $666,768.79 is greater than the $650,000 PV of the lump-sum alternative. It doesn't matter - you would be indifferent between the two alternatives. a. b. C. d. You win the Mightyball lottery, which promises a "$1 million" payout - yippee! But, there's a catch - your winnings will be paid as an annuity at a rate of $50,000 per year for 20 years, with the first payment beginning immediately. Alternatively, you may elect to receive an immediate lump-sum payout of $650,000. If the appropriate interest rate is 4.75% (compounded annually), which alternative should you select, and why? The annuity alternative, because its PV of $1,000,000 is greater than the $650,000 PV of the lump-sum alternative. The lump-sum alternative, because its PV of $650,000 is greater than the $636,533 PV of the annuity alternative. The annuity alternative, because its PV of $666,768.79 is greater than the $650,000 PV of the lump-sum alternative. It doesn't matter - you would be indifferent between the two alternatives. a. b. C. d.

Answer rating: 100% (QA)

CORRECT ANSWER c The annuity alternative because its PV of 666 76879 is grea... View the full answer