Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Which lottery payout scheme is better? Suppose you win a small lottery and have the choice of two ways to be paid: You can accept

Which lottery payout scheme is better?
Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over
time. If you pick the lump sum payout, you get $2,900 today. If you pick the payments over time payout, you get three payments: $1,000 today,
$1,000 one year from today, and $1,000 two years from today.
At an interest rate of 5% per year, you would be betterfopting the
_. payout since it has the greater present value.
At an interest rate of 9% per year, you would be better off accepting the
_ payout since it has the greater present value.
Years after you win the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the
same payout schemes. She must make a quick decision about whether to collect her money under the lump sum payout or the payments over time
payout. What is the best advice to give your friend?
The lump sum payout is always better.
The payments over time payout is always better.
It will depend on the interest rate; advise her to get a calculator.
None of these answers are good advice.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The FinTech Book The Financial Technology Handbook For Investors Entrepreneurs And Visionaries

Authors: Susanne Chishti, Janos Barberis

1st Edition

111921887X, 9781119218876

More Books

Students also viewed these Finance questions