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Three choices for lottery winnings: lump sum, ordinary annuity, annuity due

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4. You have just won the lottery and you have three choices to choose from as to how you will receive your winnings.

Choice I: You would receive a lump sum payment of $75,000 today.
Choice II: You would receive $10,000 at the end of each of the next 8 years
Choice III: You would receive $10,000 at the beginning of each of the next 8 years.

You would want to choose the best choice meaning the choice with the greatest present value. Your discount rate is 8% under annual compounding

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Solution Summary

In a narrative statement backed up with Excel calculations, the response clearly explains the choices.

Solution Preview

See the attached Excel file.

First of all it should be noted that receiving money earlier is always better than receiving the same amount later so ...

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