Problem: You just won the lottery for 1 million payable in annual installments of 200,000.00 with the first payment made in 1 year. Alternative, you could accept 850,000.00 today. Regardless on whether you take the 200,000.00 annually or the 850,000 today, you are confident yoiu could earn 8% each year on the payout or the next 5 yrs. If your objective is to have the most money at the end of 5 yrs, what should you do?
1) Take the million in 5 installments because 1 million compounded at 8% for 5 yrs is greater than 850,000 compunded at 8% over 5 yrs
2) Take the 850,000 today because its greater than the present value of the 5 200,000 annual installments discounted at 8%
3) Take the million dollars in 5 installments b/c invested the 200,000 you get each yr at 8% will give you a greater amount at the end of 5 yrs than investing 850,000 today at 8% for 5 yrs
4) Take the 850,000 today b/c the present value of the 5 200,000 annual installments discounted at 8% is greater than 850,000