The concept that when the value of a cash receipt is affected by when it is received is called present and future value. These values are based on several variables: the amount of cash and whether it is a one-time payment or a series of payments, and how long you must wait to get (or pay) the cash. The interest rate is another variable that has a very large effect on the present and future values.

Use these concepts to answer why someone would choose to take a lump sum today instead of getting more cash if they took a series of payments over a number of years. Use the potential receipt of $5 million as a one-time payment or the option of receiving an annuity based on this amount. Use a discount rate of 4% and payoff period of 20 years to compute the annuity payments. Provide numerical examples to illustrate your explanation. Ignore taxes.