You win a lottery. You are given four payout options and can hit “STOP” or “COLLECT” at any time to
collect all of the money that has been accumulated in the account.
• Option 1: Nothing is put in the account initially. The account grows by $12,000 every year
starting next year (Year1).
• Option 2: The account receives $60,000 immediately (Year 0), and then grows by $8,000 every
year.
• Option 3: The account receives $20,000 immediately (Year 0). The account accrues compound
interest at a rate of 12% each year.
• Option 4: The account receives $80,000 immediately (Year 0). The account accrues compound
interest at a rate of 5% each year.
• Extra Credit Option 5: The account receives 1 cent immediately (Year 0). The account
receives another 1 cent in Year 1, then 2 cents in Year 2, 4 cents the year after that, and double
each previous year’s amount as time goes on.
TASK: Decide which option you would choose, and justify your answer with mathematics and well-
reasoned arguments. State any assumptions you make as you consider the options and justify your answer.
