Question
Problem 4 (11 points) You have recently won the super jackpot in the Conch Republic Lottery. On reading the fine print, you discover that you
"Problem 4 (11 points) You have recently won the super jackpot in the Conch Republic Lottery. On reading the fine print, you discover that you have the following three options: Option 1: You will receive 31 annual payments of $175,000, with the first payment being delivered today. The payments will be taxed at a rate of 28 percent. Option 2: You will receive $530,000 now, and you will not have to pay taxes on this amount. In addition, beginning one year from today, you will receive $125,000 each year for 30 years. These payments will be taxed at 32 percent. Option 3: You will receive $150,000 now, and you will not have to pay taxes on this amount. The payment next year will be $125,000 and will grow at 4 percent per year for 30 payments. These payments will be taxed at a rate of 30 percent. All taxes will be withheld when the checks are issued. Using an APR of 10 percent compounded monthly, which option should you select? "
Option 1: | |||
Total annual payments | 31 | ||
Annual payments | $ 175,000 | ||
Tax rate | 28% | ||
Option 2: | |||
Payment today | $ 530,000 | ||
Total annual payments | 30 | ||
Annual payments | $ 125,000 | ||
Tax rate | 32% | ||
Option 3: | |||
Payment today | $ 150,000 | ||
Total annual payments | 30 | ||
Annual payments | $ 125,000 | ||
Payment growth rate | 4% | ||
Tax rate | 30% | ||
APR | 10% | ||
Compounding periods | 12 |
(In Excel please, thank you!)
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