Case Situation:
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. Choice X pays $1,000,000. Choice Y pays $1,750,000 at the end of five years from now.
Using a discount rate of 5 percent, based on present values, which would you choose?
Using the same discount rate of 5 percent, 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.)