In 2016 A Pevely man won the Missouri lottery and was given the choice of receiving $6.8 million in cash immediately, or 25 annual payments of $400,000 each (also beginning today). At what interest rate would he be indifferent between the two options? Suppose he believes he could earn 6% annually on his investments. Which option should he take?
Question 5b) Suppose he could earn 6% annual interest on his investments. Which options should he take?
Lump Sum Calculation
1. Clear All (Orange Button, C/C All)
2. 6,800,000 PV (Present Value) button
3. 6.0 I/YR (Interest/ Year) button
4. 25 N (Number of Years) button
5. 0 PMT (Payment Amount button
6. Press FV for Future Value calculation
Lump Sum Future Value = 29,184,720.89
Annuity Payment Calculation
1. Clear All (Orange Button, C/C All)
2. 0 PV (Present Value) button
3. 6.0 I/YR (Interest/ Year) button
4. 25 N (Number of Years) button
5. 400,000 PMT (Payment Amount button
6. Press FV for Future Value calculation
Annuity Payment Future Value = 21,945,804.80
He should choose the Lump Sum Payment