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You have a winning lottery ticket for $100,000. You never will get the full $100,000. The State offers you three options. The first pays you $80,000 up front for the entire amount. The second pays you the winnings over a three-year period. The last option pays you a large payment today with small payments in the future. The payment options are detailed in the table below: (a) Calculate the present value of each payment option, assuming the interest rate is 12%. (b) Then, calculate the present values based on an interest rate of 5%. (c) Compare your answers and explain why they are different when the interest rate changes.

Amount paid today

80000

22000

50000

Amount paid after 1 year

0

22000

12000

Amount paid after 2 years

0

22000

12000

Amount paid after 3 years

0

22000

12000

Please show work and type answer.

Macroeconomics, Economics

  • Category:- Macroeconomics
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