You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options:
a. You will receive 31 annual payments of $170,000, with the first payment being delivered today. The income will be taxed at a rate of 28 percent. Taxes will be withheld when the checks are issued.
b. You will receive $585,000 now, and you will not have to pay taxes on this amount. In addition, beginning one year from today, you will receive $120,000 each year for 30 years. The cash flows from this annuity will be taxed at 28 percent.
Using a discount rate of 7 percent, what is the present value of your winnings?
Present value of Option A $
Present value of Option B $