Reference no: EM131985182

Since we're talking about applying the time value of money to a lottery scenario let's actually go through an example. Imagine the following scenario.

Congratulations! You just won the local lottery. You are given the choice of receiving either of the following:

i) $10,000 each year for the next ten years starting in one year, or

ii) a lump-sum payment today of $70,000.

You want to determine which is the preferable option, the annuity or the lump-sum payment today. To help you in your analysis your friend, Banker Brad, tells you that you could lock-in an interest rate of 4% for the next 10 years were you to make any investments this week. (Assume taxes and life-expectancy are not an issue.)

Which would you choose and why? What calculations would you use (i.e. applying the TVM) to determine your answer. (Calculate the present value of the annuity and then compare it to the lump-sum payment.)

Just to summarize here, use the 4% as your discount rate for the TVM analysis and ignore things such as taxes and life-expectancy, etc. We want to really focus on the math of the TVM in this example.

Please have correct calculations and discription of why you used those calculations.