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Lottery choice

You have just won the Golden Basket lottery which gives you the choice of your prize being either a house and land package with a current market value of $500,000 or receiving cash totalling $600,000 paid in three instalments of $200,000, $150,000, $250,000 respectively. If you choose the cash alternative the first of amount will be paid to you at the end of two years from today's date and the next and subsequent amount will be paid at the end of 3 years from the date of the previous instalment. If you use the nominal rate of 6.5 percent per annum that currently applies for a monthly repayment housing loan as your time value of money, use appropriate calculations to determine whether you should accept the house and land package or the cash instalment alternative. Draw appropriate timeline(s) to demonstrate your calculations.

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Solution Summary

The solution explains how to decide whether to accept the house and land package or receive cash in installments