Question
Value of an annuity versus a single amount. Assume that you just won the state lottery. Your prize can be taken either in the form
Value of an annuity versus a single amount. Assume that you just won the state lottery. Your prize can be taken either in the form of $86,000 at the end of each of the next 25 years (that is, $2,150,000 over 25 years) or as a single amount of $1,215,000 paid immediately. a. If you expect to earn 6% annually on your investments over the next 25 years, ignoring taxes and other considerations, which alternative should you take? Why? b. Would your decision in part a change if you could earn 8% rather than 6% on your investments over the next 25 years? Why? c. At approximately what interest rate would you be indifferent between the two options?
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