You have just won $1,000,000 in the lottery. You have the option of taking a lump sum payout or equal annualized payments over 20 years. Ignoring any tax consequences; how much should you expect from the annualized payments what target interest rate would make the annualized payments more valuable than the lump sum. Consider such issues as inflation, investing a lump sum in the stock market (What have been the long-term historical returns?) to generate your own annualized payment schedule, as well as the psychological components – receiving a $1,000,000 check.
There are multiple factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact both the present value and the future value of the annuity.