You Are Considering Two Lottery Payment Streams

question 56

Essay

You are considering two lottery payment streams. Choice A pays $1,000 today and choice B pays
$1,750 at the end of five years from now. Using a discount rate of 5%, based on present values,
which would you choose? Using the same discount rate of 5%, based on future values, which would
you choose? What do your results suggest as a general rule for approaching such problems? (Make
your choices based purely on the time value of money.)

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Definitions:

Damages

Compensation claimed or awarded in court for a loss or injury as a result of breach of contract or tort.

Entry Restrictions

Regulations or barriers that prevent new competitors from easily entering an industry or area of business.

Revenue Function

A mathematical relationship describing how a firm’s total revenue changes with variations in output or sales.

Total Profits

The entirety of financial gains earned by a business after subtracting all costs and expenses from total revenues.