Mathematics, 27.03.2021 05:10 aROSSconpollo
Suppose that you are deciding whether to buy a $1 lottery ticket. The jackpot is $1.1 million and there is a 1/1,000,000 chance of winning. In addition, you may choose to receive the jackpot as a lump sum immediately or in yearly payments over 4 years. If you choose the lump sum, you only get 75% of the money but you get it all at once. If you choose the yearly payments, you will receive a payment of $275,000 over 4 years with the first payment made in one year. The interest rate is 4% per year. A. Determine expected present value of the payoff associated with the yearly payments option. In other words, determine the present value of 1.1 million paid out over 4 years. B. Draw the decision tree for this problem. Use the present value of the payoffs. In your diagram, just include the payoffs and not the expected values or probabilities. You can create the decision tree by hand (and snap a photo) or use computer software. Paste the diagram here. C. Solve the decision tree to determine the correct decision(s) based on an expected present value. Show your calculations of the expected value for each alternative.
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Suppose that you are deciding whether to buy a $1 lottery ticket. The jackpot is $1.1 million and th...
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