You have a winning lottery ticket for $100,000. You never will get the full $100,000. The State offers you three options. The first pays you $80,000 up front for the entire amount. The second pays you the winnings over a three-year period. The last option pays you a large payment today with small payments in the future.
The payment options are detailed in the table below:
(a) Calculate the present value of each payment option, assuming the interest rate is 12%.
(b) Then, calculate the present values based on an interest rate of 5%.
(c) Compare your answers and explain why they are different when the interest rate changes.
|
Amount paid today
|
80000
|
22000
|
50000
|
|
Amount paid after 1 year
|
0
|
22000
|
12000
|
|
Amount paid after 2 years
|
0
|
22000
|
12000
|
|
Amount paid after 3 years
|
0
|
22000
|
12000
|
Please show work and type answer.