Arecent mega millions estimated jackpot amount is $300 million which is the undiscounted sum of the 26 annuity option payments with a cash option of $207 million. the first payment under the annuity option which would occur immediately is $4,515,432 with 29 additional annual payments with each payment being 5% larger than the previous one. using this information and assuming you demand a 4% annual return, would you prefer the annuity option or the cash option if you have the winning ticket?

Itis better to take the case in hand of 207,000,000 millions

Explanation:

We need to calcualte the present value of a geometric annuity-due

g0.05

r0.04

C4,515,432

n26

n26

 127,557,727.45

As is an annuity due, we multiply by (1+r)

127,557,727.45 x (1+0.04) = 132,660,036,548

The present value of the 207,000,000 option is better as the annuity present value is around 130,000,000

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the answer is a.

by: nicholas dooley