Question
Can you show the math for all 3 parts of texas lottery question? Congratulations! You have won the Powerball! The Lottery Commission informs you that
Can you show the math for all 3 parts of texas lottery question?
Congratulations! You have won the Powerball! The Lottery Commission informs you that you have won a million dollars, and that your million dollar prize will be paid to you in 20 equal installments of $50,000 to arrive every year, with the first payment coming today, and subsequent payments each year at the end of the following years.
a. What is the present value of your lottery winnings? Did you really win a million dollars?
Your first calculation didnt make you feel great, but you still feel pretty rich. But now someone reminds you that the lottery winnings are taxable, and that youre going to have to pay 35% in taxes on the date you receive the payments.
- What is the present value of your after-tax lottery winnings? (Remember, taxes are only paid once the cash flows are received in finance, the timing of the cash flows are important.)
- Given the payoff scheme of the lottery where you receive 20 equal annual payments with the first payment received today, what amount must you win to be a true present- value after-tax millionaire (use the same 35% tax rate as above)? In other words, what is the amount that must be advertised as the lottery amount such you actually end up with one million dollars in present value?
Use a discount rate of 8% in all PV calculations.
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