Winning the Lottery

Let’s have a little fun this week, shall we? Pretend for a moment that you won $1,000,000 in the state lottery and had a choice between receiving $50,000 a year for 20 years, or receiving a one-time payment immediately for $560,000. After getting over your initial excitement, what payment option would you take and why? In your decision, apply the time-value of money by computing the present and future value of the payments. Show your calculations. Finally, what other factors are important to consider in making your decision?

Part 2

Assume that you borrowed $500 from a friend and promised to repay the loan in five equal annual installments, starting a year from today. Your friend wants to be reimbursed at an 8% annual interest rate. Explain how you would compute the required annual payment. Show your calculations.