1. You recently won a lottery and have the option of receiving one of the following three prizes: (1) $90,000 cash immediately, (2) $35,000 cash immediately and a six-year annual annuity of $9,400 beginning one year from today, or (3) a six-year annual annuity of $17,700 beginning one year from today. Assuming an interest rate of 5% compounded annually, determine the present value for the above options. Which option should you choose?

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.