(Evaluating Payment Alternatives) Terry OMalley has just learned he has won a $900,000 prize in the lottery....
Question:
(Evaluating Payment Alternatives) Terry O’Malley has just learned he has won a $900,000 prize in the lottery. The lottery has given him two options for receiving the payments: (1) If Terry takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. (2)
Alternatively, the lottery offers Terry a payout of 20 equal payments of $62,000 with the first payment occurring when Terry turns in the winning ticket. Terry will be taxed on each of these payments at a rate of 25%.
Instructions Assuming Terry can earn an 8% rate of return (compounded annually) on any money invested during this period, which pay-out option should he choose?
Step by Step Answer:
Intermediate Accounting
ISBN: 9780471448969
11th Edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield