Value of an annuity versus a single amount: Assume that you just won the state...
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Value of an annuity versus a single amount:
Assume that you just won the state lottery. Your prize can be taken either in the form of $58,000
at the end of each of the next 30 years (that is, $1,740,000 over 30 years) or as a single amount of $1,057,000 paid immediately.
a. If you expect to earn 5% annually on your investments over the next 30 years, ignoring taxes and other considerations, which alternative should you take? Why?
b. Would your decision in part a change if you could earn 7% rather than 5% on your investments over the next 30 years? Why?
c. At approximately what interest rate would you be indifferent between the two options?
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