Congratulation! You are the winning entry in the OSC Sweepstakes. As the lucky winner you receive the opportunity to receive one of the following three prize packages: A $25,000 lump sum payment...

Congratulation! You are the winning entry in the OSC Sweepstakes. As the lucky winner you receive the opportunity to receive one of the following three prize packages:

1. A $25,000 lump sum payment today;


2. A $4,000 payment today and a $22,500 payment one year from now;


3. A $9,000 payment at the end of this year and a $20,000 payment at the end of the next year.

You may assume that all payments are quoted in after-tax dollars.

a.) If the interest rate is 7% and inflation is expected to be zero over the next two years, which of the above three options would you choose? Why?

b.) If the interest rate is actually 10%, which option would you choose? Would your choice be different than the choice you made in part a?

QUESTION 2