The Winner of the Mega Millions Lottery Game Can Choose

question 4

Multiple Choice

The winner of the Mega Millions lottery game can choose to accept a one-time payout of $190.1 million or receive $11 million per year for 30 years. Assuming no tax consequences and an interest rate of 4 percent, using the tables shown below, what is the best decision for the winner? $\begin{array}{|r|l|}\hline\begin{array}{c} \text { Annuity Table } \\ \text { (value now of \$1 Per year To be } \\ \text { received for x-years) } \\\begin{array}{c|c|c|c}\hline {\text { Year }} & \mathbf{3 \%} & \mathbf{4 \%} & \mathbf{6 \%} \\\hline 10 & 8.53 & 8.11 & 7.36 \\\hline 15 & 11.94 & 11.12 & 9.71 \\\hline 20 & 14.88 & 13.59 & 11.47 \\\hline 30 & 19.60 & 17.29 & 13.76 \\\hline\end{array}\end{array}& \begin{array}{c} \text { Present Value Table } \\ \text { (Value now to \$ 1 to be received} \\ \text { x-years un the future) } \\\begin{array}{c|c|c|c}\hline \text { Year } & \mathbf{3} \% & \mathbf{4 \%} & \mathbf{6 \%} \\\hline 10 & 0.74 & 0.68 & 0.53 \\\hline 15 & 0.64 & 0.56 & 0.42 \\\hline 20 & 0.55 & 0.46 & 0.31 \\\hline 30 & 0.41 & 0.31 & 0.17 \\\hline\end{array}\end{array}\\\hline\end{array}$

• A)Take the payout over 30 years because that's more money.
• B)Take the $190.1 today because that's more money.
• C)It does not matter because the two payouts cannot be compared.
• D)It does not matter because the two sums have roughly equal time values.

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Definitions:

Convexity

In economics and finance, convexity refers to the shape of the curve that demonstrates how the duration of a bond changes as the interest rate changes.

Production Function

An equation that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs.

Input

Resources used in the production process to create goods or services, including labor, materials, and capital.

Returns To Scale

An economic concept describing how the increase in inputs affects the level of output of a production process.