Question: Tony Long has just learned he has won a $510,300 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Tony takes all the money today, the state and federal governments will deduct taxes at a rate of 47% immediately. (2) Alternatively, the lottery offers Tony a payout of 20 equal payments of $36,800 with the first payment occurring when Tony turns in the winning ticket. Tony will be taxed on each of these payments at a rate of 25%.
Compute the present value of the cash flows for lump sum payout. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Lump sum payout $
Assuming Tony can earn an 9% rate of return (compounded annually) on any money invested during this period, compute the present value of the cash flows for annuity payout. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Present value of annuity payout $
Which pay-out option should he choose?
Lump Sum PayoutAnnuity Payout