A bar owner in Wisconsin has just won the Illinois Big Lotto jackpot that pays $200 million dollars in 25 equal installments paid annually. The bar owner can either accept the annual payments starting today or receive a lump sum today, using a discount rate of 9% per year. If the bar owner chooses to accept the lump sum, how much will he receive today?
Click on the arrows to vote for the correct answer
A. B. C. D.A
The annual lotto payments equal 200/25 = 8 million dollars per year. Since the payments start today, the cash stream equals a payment of 8 million dollars today and an ordinary annuity with 24 payments. Thus, the present value of the lotto equals 8 + 8/0.09*(1-1/(1.09^24)) = 85.65 million dollars.