Part 1. Time value of money and the lottery. A friend of yours by the name of Sam has asked you for financial advice. He recently won a state lottery and was asked by the lottery officials to choose between the following payout options:
Option 1 - Receive a lump sum payment today of $61 million OR
Option 2 - Receive 30 end-of-year payments of $5.5 million each.
Question 1: Assume that Sam is 25 years old and he thinks a 7% annual earnings rate is appropriate. Which option should Sam choose and why? To answer this question, use a financial calculator and find the present value (PV) of each option. Identify the TVM keystrokes for your particular calculator that you used to find the PV of each option. Check figure: PV of option #2 (using HP12C) is n=30, i=7, PMT= -5,500,000, FV=0, and PV = $68,249,727.
Question 3: Would your answer to question 1 change if Sam expects a 9% return on his investments instead of 7%? Why or why not? To receive credit, please show the keystrokes you used. Check figure: PV of option #2 (using HP12C) is n=30, i=9, PMT= -5,500,000, FV=0, and PV = $56,505,097.
Which equation do I need to use to find number 1 and 3?