Question
Morgan Long has just learned he has won a $509,500 prize in the lottery. The lottery has given him two options for receiving the payments.
Morgan Long has just learned he has won a $509,500 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Morgan takes all the money today, the state and federal governments will deduct taxes at a rate of 47% immediately. (2) Alternatively, the lottery offers Morgan a payout of 20 equal payments of $41,800 with the first payment occurring when Morgan turns in the winning ticket. Morgan will be taxed on each of these payments at a rate of 25%.
Compute the present value of the cash flows for lump sum payout. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Assuming Morgan can earn an 11% rate of return (compounded annually) on any money invested during this period, compute the present value of the cash flows for annuity payout. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Present value of annuity payout.... $
Which pay-out option should he choose?
annuity payout or lump sum payout
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