You won the state lottery worth $20,000,000. The state offers you 4 payment plans. Plan 1 is $16,000,000 now 1 payment Plan 2 is $4,000,000 every 5 years 4 payments Plan 3 is $900,000 every year 20 payments Plan 4 is $500,000 every year and $10,000,000 at year 20 20 payments Which one do you choose based on PURE ENGINEERING ECONOMY? WHY? Assume an interest rate of 5%. Note: Your parents (or mate) strongly urge you to take Plan 4 knowing your excessive and out of control spending habits.
Please check my answer below:
He should take the first option. This is due to the fact that considering the 5% interest rate, the present value of the first option is the highest return he received using present-future value equation with the stated payment frequency.