math ( Discrete Functions)

posted by Sammy

lottery offers two options for the prize. (7)

Option A: $1000 a week for life.

Option B: $600 000 in one lump sum.

If you choose Option B, you have the opportunity to place the winnings into an investment that also makes regular payments, at a rate of 3%/a, compounded monthly.

Which option would the winner choose if s/he expects to live for another 50 years?
At what point in time is Option A better than Option B?

  1. Reiny

    I assume we have to ignore taxes, which would be a silly assumption, but anyway ....

    We have to compare $600,000 with the present value of the annuity

    PV of annuity = 1000( 1 - 1.0025^-600)/.0025
    = $310,580.71

    what would be your choice?

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