Question

Assume that you just won $40,000,000 in the Florida lottery, and hence the state will pay you 25 annual payments of $1,600,000 each beginning immediately. If the rate of return on securities of similar risk to the lottery earnings is 4 percent, what is the present value of your winnings? Please show your work.

Answer 1

Answer 2

Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next twenty-five years (i.e., $1 million over twenty-five years) or as a lump sum of $500,000 paid immediately. a. If you expect to be able to earn 5 percent annually on your investments over the next twenty-five years, ignoring taxes and other considerations, which alternative should you take? Why? b. Would your decision in part (a) be altered if you could earn 7 percent rather than 5 percent on your investments over the next twenty-five years? Why? c. On a strict economic basis, at approximately what earnings rate would you be indifferent when choosing between the two plans?