Congratulations! You Have Just Won the Lottery! However,the Lottery Bureau

question 42

Essay

Congratulations! You have just won the lottery! However,the lottery bureau has just informed you that you can take your winnings in one of two ways.You can elect to receive a payment of $1,000,000 now or a payment of $1,750,000 in five years.Assume you can earn 5% on funds that you invest today.How much money would you have in five years if you take the immediate $1,000,000 payment and invest it? What does this tell you about the wisdom of selecting the immediate payment versus the future payment? Using the same 5% interest rate,what is the present value of the $1,750,000 that you could receive in five years? What does this calculation tell you about which lottery payout option you should 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:

Make or Buy

A decision-making process used by companies to determine whether they should produce goods internally or purchase them from an external supplier.

Indirect Spend

Expenses incurred for materials, services, and maintenance that do not directly contribute to the production of goods.

Direct Spend

Expenses directly tied to the production of goods or services, such as raw materials and labor.

Outsourced

The practice of having certain job functions or processes handled outside of the company, typically by a third party, to reduce costs or focus on core competencies.