Value of an annuity versus a single amount: assume that you just won the state lotery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (that is $1,000,000 over 25 years or as a single amount of $500,000 paid immediatly.
a. If you expect to be able to earn 5% annualy on your invesment over the next 25 years, ignoring taxes and other consideratios, which alternative should you take?
b. Would your decision in part a change it you could earn 7% rather than 5% on your invesments over the next 25% years ?
c. On a strictly econmics basis, at approximatly what earnings rate would you be indifferent between the two plans?