Question
value of an annuity versus a single amountPersonal Finance ProblemAssume that you just won the state lottery. Your prize can be taken either in the
value of an annuity versus a single amountPersonal Finance ProblemAssume that you just won the state lottery. Your prize can be taken either in the form of $95,000 at the end of each of the next 20 years (that is, $1,900,000 over 20 years) or as a single amount of $1,233,000 paid immediately. a. If you expect to be able to earn 5% annually on your investments over the next 20 years, ignoring taxes and other considerations, which alternative should you take? Why? b. Would your decision in part a change if you could earn 7% rather than 5% on your investments over the next 20 years? Why? c. On a strictly economic basis, at approximately what earnings rate would you be indifferent between the two plans?
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