Let's say that someone at work approached you with some lottery tickets they were selling. This person has been your friend for a couple of years and you felt obligated to buy two tickets at $5 each just to show your support. You didn't pay much attention to what was written on the ticket beyond the "Grand Prize of $200,000!" at the top and didn't figure the odds would be in your favor in any case - this was only a courtesy purchase.
Two months later you are contacted and told that you have won the grand prize! That's $200,000! But, since you didn't select the box that stipulates that you would like to be paid in one lump sum, you will be receiving the money in monthly payments over the next twenty years instead. That's $833.33/month for the next 240 months. Sounds good!
But, after receiving the first two years of payments you begin to wish that you had taken the lump sum instead. There has been a great investment opportunity that you had to turn down because you didn't have the money at hand, and you were thinking about going back to college and changing careers, too - but, again not enough cash at hand. What if someone offered you a lump sum cash payout for that monthly income? Would you be willing to take $140,000 now for that last 18 years of monthly payments?
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