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Author Question: Suppose you hit a progressive jackpot on a slot machine in a casino in Atlantic City and are given ... (Read 106 times)

Beheh

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on: Jun 29, 2018
Suppose you hit a progressive jackpot on a slot machine in a casino in Atlantic City and are given the choice of the following prizes:
 
  Prize 1: 150,000 to be received right away, with three additional payments of 150,000 to be received each year for the next three years.
  Prize 2: 500,000 to be received right away.
 
  If the interest rate is 5 percent, what is the present value of each prize?

Question 2

With state and multistate lotteries, winners are typically given the choice between a lump sum payment today or a 20 year series of annuities. How should a winner decide which is better?
 
  What will be an ideal response?
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britb2u

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Reply #1 on: Jun 29, 2018
Answer to Question 1

Prize 1: Present value = 150,000 + 150,000 / (1 + 0.05 ) + 150,000 / (1 + 0.05 )2 + 150,000 / (1 + 0.05 )3 = 558,487.20
Prize 2: Present value = 500,000

Answer to Question 2

The winner should decide by determining the present value of the multiyear annuity payout and comparing it to the lump sum payment. Whichever has the largest present value is the best choice.


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