1. Time Value of Money Problem

Congratulations! You have just won the lottery! However, PCSO has just informed you that you can take your winnings in one of two ways:

Choice A pays P1,000,000 lump sum immediately.

Choice B pays P1,750,000 at the end of five years from now.

Questions:

• Using a discount rate of 5 percent, based on present values, which would you choose?
• Using the same discount rate of 5 percent, based on future values, which would you choose?
• What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.)
• On a personal note, do you bet on the Lotto? Why or why not?