Suppose it was announced this morning that the winner of the Powerball lottery will receive a Grand Prize of $73.7 million.
However, the winner will not get to collect $73.7 million in cash. Instead, the winner is offered two options.
1. Collect the prize in 25 annual payments of $2.948 million each (before-tax) or
2. Take a one-time lump sum payment of $41.4 million (before-tax) now.
For this exercise, assume that you are an esteemed financial planner and the Prize Winner has approached you for advice. The winner wants to know, should he or she take the 25 payments of $2.948 million each, or should he or she take the $41.4 million lump sum payment?
What would you advise the winner to do and why? Remember, the quality of your answer determines the size of your fat financial planner fee