Reference no: EM132589722

Mr. R.I.P. Cobain is offered the following alternatives for a lottery winning:

Option 1: A lump sum payment of $10,000, 12 years from now, or

Option 2: A lump sum payment of $25,000, 25 years from now, or

Option 3: $3,500 today.

Required:

a) Showing all calculations, and assuming that Mr. Cobain can otherwise earn a fixed rate of 8% p.a. compounded monthly on his money over each of the next 25 years, which of the options included above would you recommend him to choose based solely on financial principles?

b) Given your recommendation in part a) of this question, how would you state this preference to Mr. Cobain in a language that he can understand that provides a convincing argument for this selection?

c) What implicit assumptions are included in your recommendations made in part a) of this question, which may be unrealistic when applied to 'real-world' issues and factors, and may actually result in a different selection outcome than that provided in your recommendation?