Suppose that you have a winning lottery ticket for $100,000. The State of California doesn't pay this amount up front - this is the amount you will receive over time. The State offers you two options. The first pays you $80,000 up front and that will be the entire amount. The second pays you winnings over a three year period. The last option pays you a large payment today with
small payments in the future. The payment options are detailed in the table below:
Compute the present value of each payment option, assuming the interest rate is 12%. Now, compute the present values based on an interest rate of 5%. Compare your answers, explaining why they are different when the interest rate changes. When the interest rate is 5%, the present values are as follows:
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