If you won $2,5 million in a lottery. You can receive $1.3million now or $100,000 at the end of each of the next 25 years, You can earn 5% annually on the investments . Which is the better option?
To determine which option is better, we need to calculate the present value of each option and compare them.
Option 1: Receiving $1.3 million now.
The present value of this option is the current amount you would receive. In this case, it is $1.3 million.
Option 2: Receiving $100,000 at the end of each of the next 25 years with a 5% annual interest rate.
To calculate the present value of this option, we can use the formula for the present value of an annuity:
PV = C × [(1 - (1 + r)^(-n)) / r]
Where:
PV = Present value
C = Cash flow per period ($100,000)
r = Interest rate per period (5% or 0.05)
n = Number of periods (25 years)
By substituting the values into the formula, we can calculate the present value of option 2.
PV = $100,000 × [(1 - (1 + 0.05)^(-25)) / 0.05]
= $1,783,532.58
Comparing the present values, we find that option 2 has a higher present value ($1,783,532.58) compared to option 1 ($1.3 million). Therefore, receiving $100,000 at the end of each of the next 25 years is the better option.
Please note that the decision depends on various factors such as your financial goals, risk tolerance, and the time value of money. It would be a good idea to consult with a financial advisor to make an informed decision based on your specific circumstances.