One thing has changed since this article was written, the top individual tax bracket is now 37%.

You just won $1,500,000 in the lottery! The state will pay your winnings evenly over 30 years (this is an annuity) or you can choose a lump sum option today, and you will receive the present value of that annuity. Assume the state uses a 6% interest rate to discount cash flows. The present value of an annuity at 6% for 30 years is 13.7648. To receive maximum credit, be sure to show your work!

• If you choose the annuity option, how much of the winnings (before tax) will you receive each year?

• Assume the lottery will withhold federal and state income taxes equal to 25% of your annuity, what will be your net payout in winnings per year?

• What is the total amount of winnings (net of tax) that you will receive in cash over the 30-year period?

• Assume you would rather take the payout today. What is the lump sum you will receive (before tax) if you take your winnings today?

• Assume your tax rate is 25%, how much of the winnings will you actually receive in cash?

• Even though your answers to 3) and 5) are much different, keep in mind that you can take a lump sum today, invest it, and it will grow with interest at possibly more than 6%. Which option would you choose and why (there is no incorrect answer here, as long as you support your answer)?