Ana has won a lottery. She was offered two options to receive the award: She can either take it in five installments of \$60,000 annually, starting from now; or she can take a lump-sum of \$271,000 now. Assuming (a) interest at an annual rate of 5\% compounded annually, or (b) interest at an annual rate of 6\% compounded continuously, which option should she choose under the consideration of cash value only?
Answer:
(a) If the interest is at the annual rate of 5\%, compounded annually, then the present value of the five installments is \$259768.60. Compared to the lump-sum of \$271,000 taken now, Ana should choose the option of five installments
(b) If the interest is at the annual rate of 6\%, compounded continuously, then the present value of the five installments is \$251509.01. Compared to the lump-sum of \$271,000 taken now, Ana should choose the option of five installments