Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next twenty-five years (i.e., $1 million over twenty-five years) or as a lump sum of $500,000 paid immediately.
a. If you expect to be able to earn 5 percent annually on your investments over the next twenty-five years, ignoring taxes and other considerations, which alternative should you take? Why?
b. Would your decision in part (a) be altered if you could earn 7 percent rather than 5 percent on your investments over the next twenty-five years? Why?
c. On a strict economic basis, at approximately what earnings rate would you be indifferent when choosing between the two plans?