Suppose that you have just won the California Lottery. You have a choice of accepting a lump sum of $20,000 now, or taking $100 permonth for rest of your life. In either case, you will put the money into a savings account paying 4% per year interest, compounded monthly, and let the interestaccumulate. Assume that the IRS charges you no income tax. Use STELLA models to solve the following:
If you accept the $20,000, how much will youhave after 10 years? (Use Table) After 40 years?
$100 PER MONTH
If you accept the $100 per month, how much will you have after 10 years? (Use Table) After40 years?
WHICH IS BETTER?
Using a graph, show how long it will be before the amount you will have from the $100 per month plan will exceed the amount youwill have from the $20,000 lump sum plan? Attach your graph and state how many years it takes before the $100 per month is better. If you were 40 years old, whichoption would you select? (assume you would probably live to age 75) If you were 80 years old, which option would you select? (assume you would probably live toage 89)
Using a graph, show that if you get an annual interest rate of 7%, compounded monthly, the $100 will never give you as much money asthe $20,000 lump sum plan. Why does the $100 catch up with the 4% and never catch up with 7% interest ? Why does your graph clearly show that the lump is betterif you get 7%?
Explain why one of the choices(monthly or lump) will always be better ? Hardcopies(graphs) which is better never catches up