Question 2

Tri-State Megabucks Lottery advertises a $10 million grand prize. The winner receives $500,000 today and 19 annual payments of $500,000. A lump-sum option of $5 million payable immediately is also available.

2a. Suppose you won the lottery, what factors should you take into account in deciding whether you should take the annuity option or the lump-sum option?

2b. If there is another annuity option with 10 annual payments, how much will the winner receive? Why? (Hint: calculate the discount rate first by assuming the annuity of $500,000 has a present value equal to $5 million)