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Suppose you hit a jackpot on a slot machine in a Las Vegas
casino and are given the choice of the prizes below.

Assume your discount rate (i.e. the interest rate) is 7%.

What is the present value of each prize, and which one would you
choose?

• Prize 1: $150,000 to be received right away, with three
additional payments of $150,000 to be received each year for the
next three years.

• Prize 2: $500,000 to be received right away.

• Prize 3: $650,000 to be received five years from now.