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Assume I won 8 million dollars in a lottery. I could take my winnings in installments of 2 million dollars a year for four years or a lump sum of fewer than 8 million dollars. If I take the installments, my first installment would come the day I claimed my winnings at the state lottery office. Assume that the interest rate is 7% per year and that there are no taxes on the winnings.
Calculate what the lump sum should be so that it would exactly equal the present value of the stream of the future stream of installments from the lottery. You must show and explain your work to be given credit for this assignment.
What would your answer change be if the first installment in the question above did not come until one year after I claimed my winnings. You must show and explain your work to be given credit for this assignment.
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