Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum, you get $2,850 today. If you pick payments over time, you get three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today.
At an interest rate of 6% per year, the winner would be better off accepting the 1) (LUMP SUM or PAYMENTS OVERTIME), since it has the greater present value.
At an interest rate of 9% per year, the winner would be better off accepting 2) (LUMP SUM or PAYMENTS OVERTIME) , since it has the greater present value.
3) Years after you win the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the same payout schemes. She must make a quick decision about whether to collect her money under the lump sum or the payments over time. What is the best advice to give your friend?
a. The lump-sum is always better.
b. The payments over time are always better.
c. It will depend on the interest rate; advise her to get a calculator.
d. None of these answers is good advice.