$5.$ 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 $$2,950$ today. If you pick the payments over time payout, you get three payments: $$1,000$ today, $$1,000$ one year from today, and $$1,000$ two years from today.

At an interest rate of $8\%$ per year, you would be better off accepting the payout since it has the greater present value.

At an interest rate of $10\%$ per year, you would be better off accepting the payout since it has the greater present value.

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?

The lump sum payout is always better.

The payments over time payout is always better.

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

None of these answers are good advice.