Howie Long has just learned he has won a $500,000 prize in the lottery. The lottery has given him 2 options for receiving the payments:
1) If Howie takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately.
2) Alternatively, the lottery offers Howie a payout of 20 equal payments of $36,000 with the first payment occurring when Howie turns in the winning ticket. Howie will be taxed on each of these payments at a rate of 25%.
Assuming Howie can earn an 8% rate of return (compounded annually) on any money invested during this period, which payout option should he choose?
This question was asked on Apr 30, 2010.
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