On March 17,2016 you won $527.25 million in the Powerball Lottery. The Multi-Sta

Question

On March 17,2016 you won $527.25 million in the Powerball Lottery. The Multi-State Lottery Association gave you the choice of 30 equal annual payments with the first payment of S 17.575 million due on the day you claimed your prize. The remaining 29 payments follow at one year intervals. Alternatively, you can elect to take as a lump sum payout on the day you claim your prize. Required: In general, how would you decide between future annual payments and a lump sum payout? Determine the lump sum payout that you would be offered if the Multi-State Lottery association uses a discount rate of 4%. Assuming that the total payments remain unchanged, would you prefer that the payments increase, decrease or remain constant through time? Explain your response. Assume instead the Lottery has offered you a payment of $21.7 million on the day you claim your prize and 19 additional payments at one year intervals each increasing by 2%. Prepare an Excel spread sheet to answer the following questions. In order to receive credit for your answers, you must attach a copy of your spreadsheet using the "show formulas" option. You must also use Excel's NPV function to calculate the present values. Calculate the 19 additional annual payments using the future value formula. Assuming a discount rate of 2%, calculate the lump sum payout you would receive. How do you know this answer is correct? Assuming a discount rate of 4% determine the lump sum payout. Assuming a discount rate of 8% determine the lump sum payout. Assuming the Multi-State Lottery Association offer you a lump sum payout of $334.15 million, determine the discount rate used by the Multi-State Lottery Association to compute the payout. Round your answer to the nearest percent.

Explanation / Answer

1) Lottery winnings are taxed like income, and the IRS taxes the top income bracket 39.6%. The government will withhold 25% of that before the money ever gets to the winner. The rest has to be paid at tax time. Today's Lump sum Amount = $527.25 x (1-25%) $395.44 Present Value of Future value of Annuity (assuming 4% discount rate) $303.91 Present value of fv of annual payments ($303.91)million is less than what he will receive today in lumpsum($395.44)million.Its better to take lumsump today. 2) Present Value Of Lottery (PV) $527.25 Million PMT $17.58 million NPer 30 Rate 4.00% Future Value of annual payments $303.91 millions 3) If total payments remained unchanged its better to have constant the amount of payments as recipient will be in the maximum income tax bracket on their receipts no matter if they take a lump sum or take an annuity over 30 years."Annuity over the next 30 years the rates will probably be very different when you receive each payment.

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