You and your family have won a lottery that pays you $100,000 a year forever. Ignor taxes in answering the following question and the risk of a default by the entity making the lottery payments:

A. You are offered a lump sum of $1.6 million today to forego the $100,000 a year forever. Suppose that the interest rate on ris-free investments is 5%. Would you accept the $1.6 million?

B. Suppose instead that the interest rate on risk-free investment is 10% instead of 5%. Would you accept the $1.6 million?

Answer rating: 100% (QA)

A To determine whether to accept the 16 million lump sum today we need to compare the present value ... View the full answer