Question

Juan just won $2.5 million in the state lottery. He is given the option of receiving a total of $1.3 million now, or he can elect to be paid $100,000 at the end of each of the next 25 years. If Juan can earn 5% annually on his investments, from a strict economic point of view, which option should he take? Explain why.

Answer 1

Option 1: Receive $1.3 Million now and invest for 25 years at 5% investment rate(annually)

Rate	5%	rate
Term in years	25	nper
Present Value amount	1300000	pv
Value after 25 years(A)	$4,402,261.42	FV(rate,nper,pmt,pv,type)
Formula	FV(5%,25,0,-C5,0)

Option 2: Receive $100000 at end of each year for 25 years.

Rate	5%	rate
Term in years	25	nper
Payment	100000	pmt
Value after 25 years(B)	$4,772,709.88	FV(rate,nper,pmt,pv,type)
Formula	FV(5%,25,-C12,0,0)

Difference (A)- (B)

$370,448.46

Hence, Juan should consider receiving $100,000 at the end of each year for 25 years as this would yield in benefit of $370,448.