You have won $200 million dollars and have two options to collect your money. Op

Question

You have won $200 million dollars and have two options to collect your money. Option 1 - Take all in lump sum, but you only get $100 million. Option 2 - Take all the money over ten (10) years ($15 million a year). Assuming the following, which gives you more money at the end of 15 years. Show all work!!! Assumptions: 1. Tax rate is 35% on everything! 2. The investment rate is 4% on everything! 3. You spend 10% of the money after taxes each year. You have won $200 million dollars and have two options to collect your money. Option 1 - Take all in lump sum, but you only get $100 million. Option 2 - Take all the money over ten (10) years ($15 million a year). Assuming the following, which gives you more money at the end of 15 years. Show all work!!! Assumptions: 1. Tax rate is 35% on everything! 2. The investment rate is 4% on everything! 3. You spend 10% of the money after taxes each year.

Explanation / Answer

Cash inflows before Tax Tax @35% Cash after Tax After Tax Expenses Cashflow after expenses pv factor Present Value Year Option 1 Option 2 Option 1 Option 2 Option 1 Option 2 Option 1 Option 2 Option 1 Option 2 at 4% Option 1 Option 2 0 100 $   35.00 $           -   $    65.00 $           -   $     6.50 $           -   $           58.50 $                  -   1 $    58.50 $           -   1 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.961538 $           -   $       8.44 2 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.924556 $           -   $       8.11 3 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.888996 $           -   $       7.80 4 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.854804 $           -   $       7.50 5 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.821927 $           -   $       7.21 6 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.790315 $           -   $       6.94 7 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.759918 $           -   $       6.67 8 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.73069 $           -   $       6.41 9 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.702587 $           -   $       6.17 10 $   15.00 $          -   $       5.25 $           -   $       9.75 $          -   $       0.98 $                  -   $             8.78 0.675564 $           -   $       5.93 total 100 150 35 52.5 65 97.5 6.5 9.75 58.5 87.75 58.5 71.17 Option 2 is best as it gives more money than option 1

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