Question

You have won a lottery and you have two options in the way you can receive your winnings: Option 1: $460, 000 now. Option 2: $300, 000 now and another $200, 000 six years from now. Which option is better and by how much if money is worth 4.7% compounded quarterly? p.s this is a question that I need to get correct

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Answer to a math question You have won a lottery and you have two options in the way you can receive your winnings: Option 1: $460, 000 now. Option 2: $300, 000 now and another $200, 000 six years from now. Which option is better and by how much if money is worth 4.7% compounded quarterly? p.s this is a question that I need to get correct

Expert avatar
Gene
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108 Answers
1. Calculation of the present value of Option 2:

- Present value of 300,000 is 300,000.

- For $200,000 received six years from now:

P = \frac{200,000}{(1 + \frac{0.047}{4})^{4t}}

where t = 6 years.

P = \frac{200,000}{(1 + \frac{0.047}{4})^{24}}

2. Compute the terms inside the formula:

1 + \frac{0.047}{4} = 1.01175

3. Raise to the power of 24 (since 4 \times 6 = 24 ):

(1.01175)^{24}=1.32360

4. Division to find the present value:

P=\frac{200,000}{1.32360}=151,102.93

5. Add the present value of the two amounts for Option 2:

300,000+151,102.93=451,102.93

6. Compare with Option 1:

- Option 1: $460,000

- Option 2: $452,860.28

Therefore, Option 1 is better by:

460,000-451,102.93=8,897.07

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