Suppose you won the state lottery. The lottery officials offer you the following options:
a) you can get annual payments of $50,000 for the next 20 years
or
b) you can get $700,000 in a lump sum upfront.
Ignoring issues like mortality tables, taxes, etc., answer the following questions:
1) what interest rate will make you indifferent between the two options?
2) if the market interest rate were 5%, which option would you prefer then? Support your explanation with numbers.
