Question - Alan Long has just learned he has won a $500,400 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Alan takes all the money today, the state and federal governments will deduct taxes at a rate of 48% immediately. (2) Alternatively, the lottery offers Alan a payout of 20 equal payments of $37,800 with the first payment occurring when Alan turns in the winning ticket. Alan will be taxed on each of these payments at a rate of 26%.
Assuming Alan can earn an 10% rate of return (compounded annually) on any money invested during this period, compute the present value of the cash flows for annuity payout.