John has just won the lottery! He has two options to receive the lottery winnings....
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John has just won the lottery! He has two options to receive the lottery winnings. Option 1 is that he would receive $25,000 forever. Even better, this payment will grow at 2% per year into perpetuity. Sadly however, this payment won't begin until 7 years from today. Option 2 is that he would receive $15,000 forever. This payment will grow at 2.5% per year into perpetuity. Sadly however, this payment won't begin until 2 years from today. If he assumes a discount rate of 3.5% and he is indifferent as to when payments actually begin, which should he chose as of today and why?
He should choose Option 1 because it is $166,666.67 better than Option 2. He should choose Option 2 because it is $166,666.67 better than Option 1. He should choose Option 1 because it is $93,440.96 better than Option 2. He should choose Option 2 because it is $93,440.96 better than Option 1.
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