10. Which lottery payout scheme is better?

Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum payout, you get $2,800 today. If you pick the payments over time payout, you get three payments: $1,000 today, $1,000 one year from today, and $1,000 two years from today.

1. At an interest rate of 6% per year, you would be better off accepting the (lump sum / payment over time) payout since it has the greater present value.

2. At an interest rate of 9% per year, you would be better off accepting the (lump sum / payment over time) payout since it has the greater present value.

3. Years after you win the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the same payout schemes. She must make a quick decision about whether to collect her money under the lump sum payout or the payments over time payout. What is the best advice to give your friend?

- It will depend on the interest rate; advise her to get a calculator.

- The lump sum payout is always better.

- The payments over time payout is always better.

- None of these answers is good advice.