Question
Ellen just won a $700,000 prize in the lottery. The lottery allowed her to choose how she would like to receive the prize: (1) If
Ellen just won a $700,000 prize in the lottery. The lottery allowed her to choose how she would like to receive the prize: (1) If Ellen takes all the money today, the government will deduct taxes at a rate of 35% immediately.
(2) The lottery offers Ellen a payout of 10 equal payments of $68,000 with the first payment occurring when Ellen turns in the winning ticket. Ellen will be taxed on each of these payments at a rate of 7.5%.
(3) The lottery also offers Ellen a payout of three different payments. They are $300,000 on year 3, $250,000 year 6, and $200,000 on year 9. Ellen will receive the payment at the end of year mentioned. The government will deduct taxes at a rate of 7.5% on each of those payments. Instructions Assuming Ellen can earn an 8.2% rate of return (compounded annually) on any money invested during this period, which payout option should she choose? Show your computation
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