Question
Let's talk about how financial discounting (and the financial discount factors in Table 12A) might be used. Heres a hypothetical situation, and Im making up
Let's talk about how financial discounting (and the financial discount factors in Table 12A) might be used. Heres a hypothetical situation, and Im making up some round numbers in this example to keep things simple. Lets say you win the state lottery and are given a choice: you can take a one-time $50 million lump-sum payment immediately or you can instead opt to receive an annual payment (i.e., an annuity) of $5 million every year for the next 20 years. Some of you may know someone whos hit it big in the lottery or perhaps youve heard stories like this in the news. Heres the question: Option A (the lump sum) pays out $50 million total, but Option B (the annuity) pays out $100 million in total. Why is this? What are the people at the state lottery thinking? Cant they see that these numbers dont match, and why would you not receive the full $100 million up front for the lump sum payout? (Hint: please do not say the difference is all due to taxes that are being taken out up front by the governmentits true that many decisions involve incremental tax differences, but thats not really whats driving this scenario, so lets leave taxation out of this discussion). Any thoughts?
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