# Lottey Wining

Pages: 3 (838 words) Published: April 24, 2013
Question 1: If you were one of the winners, which option would you select? Why? Answer 1:Lottery Prize = \$ 181,500,000 as 2 winner for 363 million jackpot. To decide the best option, we will compare the Present value of cash flow in both options. Taxes are ignored, as they will be applied in both the options. Option A: Lump-Sum/Cash-option payment:

Lottery will pay 50% of published value, if cash option is selected and federal Cash before taxes = 181,500,00 * 0.50 = \$90,750,000
Option B: Annuity of 26 years.
Under annuity option, Lottery takes all the money and invests to fund in 26-years annuity and gives payments to winner. Lottery invests 50% of 181,500,000 (present cash value of lump-sum amount) and Lottery received rate of interest of 4%, using calculator:

N=26, I/Y = 4, PV = -90,750,000, FV=0, CPT PMT =?
Payment = \$ 5,677,989.78 ( per year).
Now, calculate the Present Values of future payments (26 payments of \$ 5,677,989.78 /year) discount rate at 5%
Considering 5%, as investment rate of return, offered by risk-free investment. Calculate Present value:
N=26, I/Y = 5, PMT = 5,677,989.78, FV =0, CPT PV = ?
Present value = \$ 81,622,155.22
Since, The Present value of the Option A (Annuity of 26 years), is less than option A Lump-Sum). I would select Option (A) ie. Lump-Sum/Cash option.
Question 2: If you decide to select the annuity option, how much money would you receive each year after taxes? Answer 2: Lottery Prize = \$ 181,500,000 as 2 winners for 363 million jackpot. Under annuity option, Lottery takes all the money and invests to fund in 26-years annuity and gives payments to winner. Lottery invests 50% of 181,500,000 (present cash value of lump-sum amount) and Lottery received rate of interest of 4%, using calculator:

N=26, I/Y = 4, PV = -90,750,000, FV=0, CPT PMT =?
Payment = \$ 5,677,989.78 ( per year).
Payment (Before Tax) = \$ 5,677,989.78 ( per year)
Total Tax = .28 +.042 = 0.322
Cash after Taxes = 5,677,989.78 * (1 –...