In Chapter 9 we are using many formulas to determine the present or future value of money. Your textbook presents an article on page 266 (article is below) that addresses the Powerball Jackpot and the decision whether to take a lump sum or an annuity. If you were lucky enough to win the jackpot, how would you decide which to take? Give at least three criteria and explain your reasons for each. Remember we are studying the time value of money here, in this case the present value of an annuity. Please make sure your comments are on topic.

Powerball Jackpot Decisions (Article from page 266)

The largest Powerball jackpot winner to date is Gloria MacKenzie, who won a reported $590.5 million in May 2013. She bought the winning ticket at a grocery store in Florida when another customer waiting to buy a ticket let her jump the line.

The Powerball lottery is jointly played in 45 states, and the overall odds of winning the Powerball jackpot are about 1 in 175 million, according to the Multi-State Lottery Association. If you win the jackpot, one of the first choices you must make is whether to take your winnings in a single lump sum or to spread them out in annual installments over 30 years.

Perhaps because MacKenzie was 84 years old and did not expect that she would still be around to collect her winnings at 114, she opted to take the lump sum cash payout. It turns out that holding the golden ticket did not entitle Ms. MacKenzie to $590.5 million. The prize is actually a growing annuity, which means that the payout rises each year (in this case by 4 percent to keep up with expected inflation) to equal $590.5 million spread over 30 years. If a winner selects the lump sum, she gets only the present value of the growing annuity.

Ms. MacKenzie does not appear to have been outraged at being shortchanged, despite the fact that she received only $371 million63 percent of the advertised prize. If the discount rate had been higher (it was approximately 3 percent), her lump sum would have been even less. If she had chosen the annuity, she would have received $10.5 million in the first year, but almost $33 million in the final year.

Deciding which option to take in these circumstances is complicated. If you win the Powerball grand prize, contact your finance instructor for advice. You will probably discover that you are remembered as his or her favorite student.