Question
GIVEN: Caroline Balfort, was one of the winners of the lottery.She was given three options for receiving her money: 1) $400,000 cash instantly; 2) $133,000
GIVEN: Caroline Balfort, was one of the winners of the lottery.She was given three options for receiving her money:
1) $400,000 cash instantly;
2) $133,000 cash immediately along with a six-period annuity of $24,000 starting one-year from today, or
3) a six-period annuity of $30,000 starting one year from today.
The lottery office informed Caroline that the interest rate is 8%.What option should Caroline choose?
_______________________________________
Need help! I am hung up on the fact that the annuity "starts one year from today". For options 2 & 3, below, which number in green should I use? I initially thought that I'd just use the regular annuity calculation by looking up the present value annuity in a table. But isn't that number assuming that you'd start collecting the annuity immediately? Or does it take into account that you'd start one year from today? I think I'm overthinking this question. My gut is telling me to go with the green values on the left instead of the alternate green values on the right. Either way, this doesn't change my answer that she should go with Option 1 because it gives the highest present value by far.
Thanks!
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