A Lottery Winner Can Take $6 Million Now or Be

question 7

Multiple Choice

A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years. The winner calculates the internal rate of return (IRR) of taking the money at the end of each year and, estimating that the discount rate across this period will be 4%, decides to take the money at the end of each year. Was her decision correct?

• A) Yes, because it agrees with the Net Present Value rule.
• B) Yes, because it agrees with the payback rule.
• C) Yes, because it agrees with both the Net Present Value rule and the payback rule.
• D) Yes, because it disagrees with the Net Present Value rule.

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Definitions:

Switching Costs

Expenses that a consumer or company incurs as a result of changing from one product, service, supplier, or system to another.

Supplier Power

The level of control and influence that suppliers have over the price and availability of their products or services in the market.

Non-Critical Inputs

Components or materials that are not essential to the core function or operation of a product or process.

Homogenous Inputs

Inputs or resources that are identical in quality and nature, making them interchangeable in production processes.