Problem
You just won $50 million in the lottery! The state of California offers to pay you $5 million each year for 10 years (with the first payment today in period 0). The current interest rate is 2%.
i. Have you really won $50 million? How much have you won?
ii. Many state lotteries allow you to choose between a lump sum payout and a series of annual payments. Market interest rates are 2% but California says that it will be really generous and use a 10% interest rate to calculate the present value of the annual lottery payments and use this figure to make a lump sum payout in period 0. Should you take the lump sum payout or the annual payments? Why or why not?