In January 2016, the record-shattering Powerball jackpot amounting to $1.5864 billion was won by three ticket holders, John and Lisa Robinson, Maureen Smith, and Mae and Marvin Acosta. Each winner was awarded a nominal sum of $528.8 million. The Michigan Lottery can pay Powerball and Mega Millions jackpot winnings in one of two ways: as an annuity or in one lump-sum/cash-option payment for the present cash value of the jackpot share. When a winner selects annuity payments, the jackpot is paid out in equal installments over 30 years. When a winner selects the cash option, the Lottery pays the winner the present cash value of the announced jackpot in one lump-sum payment. In effect, the Lottery takes all of the money that would have been invested to fund the 30-year annuity and turns it all over to the winner, retaining absolutely none of the prize. All three winners of the January 2016 Powerball jackpot opted to take a cash-option payment amounting to $327.8 million per ticket.

Regardless of which option the winner selects, the Michigan Lottery is required by law to withhold estimated income taxes for federal (25%) and state (4.9%) on any prize over $5,000. These amounts are estimates only, and the winner is required to satisfy any further tax liability for the year in which the prize award is claimed.

1.If you were one of the three winners of the 2016 Powerball jackpot, which option would you select? Why?

2.If you decide to select the annuity option, how much money would you receive each year after taxes?

3.What discount rate is the Powerball lottery using when deciding to pay a lump sum of $327.8 million to each of the three winning ticket holders?