Recall the questions posed in the chapter opener about which is the better way of receiving payouts from lottery winnings. We now revisit those questions and show how to use series to compare values of payments over time with a lump sum payment today. We will compute how much future payments are worth in terms of today’s dollars, assuming we have the ability to invest winnings and earn interest. The value of future payments in terms of today’s dollars is known as the *present value* of those payments.

### ExAmple: Present Value of Future Winnings

Suppose you win the lottery and are given the following three options: (1) Receive 20 million dollars today; (2) receive 1.5 million dollars per year over the next 20 years; or (3) receive 1 million dollars per year indefinitely (being passed on to your heirs). Which is the best deal, assuming that the annual interest rate is 5%? We answer this by working through the following sequence of questions.

- How much is the 1.5 million dollars received annually over the course of 20 years worth in terms of today’s dollars, assuming an annual interest rate of 5%?
- Use the answer to part a. to find a general formula for the present value of payments of
*C*dollars received each year over the next*n*years, assuming an average annual interest rate*r*. - Find a formula for the present value if annual payments of
*C*dollars continue indefinitely, assuming an average annual interest rate*r*. - Use the answer to part c. to determine the present value of 1 million dollars paid annually indefinitely.
- Use your answers to parts a. and d. to determine which of the three options is best.