Congratulations!You have just won a $1,000,000 (delayed) prize in the lottery. Your state offers you the following alternatives:you can take $750,000 now, or 10 years from now you can receive the full $1,000,000
The delay isn't a problem, because you weren't planning to use any of the prize money for at least 10 years. If you take the lump sum now, you figure you can invest it at an annually compounded rate of 3 percent. Should you take the $750,000 now, or wait to get the full $1,000,000 in 10 years?Why or why not?Show any calculations.
You should take the $750,000 now.
Here are the relevant calculations:
$750,000 × (1 + 0.03)10 = $1,007,937.
So you would be $7,937 better off by taking the smaller amount now than receiving the full prize in 10 years.This assumes that you will, in fact, achieve an annually compounded return of 3 percent for the next 10 years.
A-head: INVESTMENT RETURNS
Concept: Comparing future values
You might also like to view...
In the early 1950s the two new factors that stimulated the United States' economy were ___________ and ____________.
Fill in the blank(s) with the appropriate word(s).
The higher the Herfindahl-Hirschman Index, the more firms there are in a market.
Answer the following statement true (T) or false (F)