U1 IP1 (2).docx - 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

# U1 IP1 (2).docx - You just won \$1 million dollars in the...

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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%. What is the amount you will receive today with the lump sum option? The current tax rates are 40%, the \$100,000 per year would come up to only \$60,000 per year. When looking at the option of the lump sum of \$60,000 there is an interest rate at the bank of 5%. The formula is Present Value = PMT * (1/i)*(1-1-1+i)^n = \$60,000(1-.05)(1-1/1.05^10) = \$463,304.10 Lump sum after tax payment is \$463,304 Which option would you select? How would you present your argument for a decision in a debate? I would select the lump sum payment if you can earn 5% on the money. Sorry, you didn’t win the lottery, but here’s a way you can still be a millionaire! Starting at age 22, every night you take \$5 out of your pocket and put it in a manila envelope (title it “Lottery Winnings”). At the end of the year, you place the money from the envelope in a stock fund with an average interest rate of 10%.

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