Financial Management

Question

1. You just won $1 million dollars in the lottery! They offer you two options for your winnings: a lump sum payment right now, or $100,000 a year over the next 10 years. Current 10-year interest rates are at 5%, and the current tax on lottery winnings is 40%. 
2. What is the amount you will receive today with the lump sum option?

Answer 1

Hi there,

If I'm not mistaken, I believe the question simply wants you to multiply the lump sum PV of the payout by the tax rate mentioned.

Here are the inputs to get to the PV:

Rate: .05, Periods: 10, PMT: 100,000, FV: 0

You end up with a PV of $772,178.

Multiply that by .40 to get the amount due in taxes, which is $308,869.15.

Subtract that from $772,178. You end up netting $463,303.73.

Hope this helps.

-Jose