Present Value [2913]

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Alice wins $6,000,000 in the lottery.  She can take a lump sum of $1,000,000 now and $400,000 per year for 20 years or a lump sum of $4,000,000 now.  Which should she do?  Assume that the money can be invested at 8% regardless of the terms.

 

Column

Rate

Period

Amount

Factor

Value

N/A

N/A

0

$1,000,000

1.000000

$1,000,000

20

8.0%

20

$400,000

9.818147

$3,927,259

 

 

 

 

 

$4,927,259

 

The lump sum of  $4,000,000 now is worth considerably less than $1,000,000 plus the present value of the annuity.  There is no question that Alice should accept the annuity.

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