Say you win $10 million. The lottery agency offers you a choice: take $500,000 per year over
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Question:
Say you win $10 million. The lottery agency offers you a choice: take $500,000 per year over 20 years or take a one-time lump-sum payout of $6,700,000.
You would choose the alternative with the greatest value. How do you determine this?
The present value of the lump-sum payout is $6,700,000.
The value of the annuity is not simply $10 million, or $500,000 20, because those $500,000 payments are received over time and time affects liquidity and thus value. For example, the same amount of dollars today may not buy you as much 10 years from now.
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