Question: On March 6, 2007, the Associated Press reported that Ed Nabors had won half of a $390 million jackpot, the largest lottery prize in US history at the time. Suppose he was given the choice of receiving his $195 million share paid out continuously over 20 years or one lump sum of $120 million paid immediately.
(a) Which option is better if the interest rate is 6%, compounded continuously? An interest rate of 3%?
(b) If Mr. Nabors chose the lump-sum option, what assumption was he making about interest rates?