The Maxwell School

Syracuse University

Syracuse University

Imagine that you stumble across a winning lottery ticket whose prize is a million dollars. Your first reaction, no doubt, would be to ask how the prize money will be paid out so that you could compute its present value.

- Suppose it is to be paid out in 10 installments of $100,000 each. If the interest rate is 5%, what is the present value of the prize?
- Now suppose the lottery commission offers you a choice: the 10 payments in part (1) or $50,000 per year forever. Which is better in terms of present value?
- What if the stream of payments in part (2) only lasted 30 years instead of forever. What has the highest present value then? Hint: there is an easier way to solve this problem than adding up the present values of 30 payments one at a time.

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URL: https://wilcoxen.maxwell.insightworks.com/pages/293.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 08/17/2016

URL: https://wilcoxen.maxwell.insightworks.com/pages/293.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 08/17/2016