Problem 6-4

Newman Long has just learned he has won a $505,400 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Newman takes all the money today, the state and federal governments will deduct taxes at a rate of 48% immediately. (2) Alternatively, the lottery offers Newman a payout of 20 equal payments of $40,500 with the first payment occurring when Newman turns in the winning ticket. Newman will be taxed on each of these payments at a rate of 26%. Click here to view factor tables 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.)

Lump sum payout

$ Assuming Newman 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

$