Congratulations! You just won a lottery. You have two options to collect your winnings:

Question

Option (1): collect a lump-sum of $100,000 six years from now, or • Option (2): collect a lump-sum of $147,000 ten years from now. a) If your bank offers a rate of 10% per year on any deposit, which option should you prefer?

Answer 1

In this problem you need to compare the present values of the two options. The formula for present value is:

PV = FV/((1+r)^t), where P is the future $ amount, r is the interest rate, and t is the number of years.

For the $100,000 option, the PV is 100000/((1+.09)^6) = $56,447

For the $147,000 option, the PV is 147000/((1+.09)^10) = $56,675

Thus, you would prefer (slightly) the deferred option.