Cash-Value Option | $3.46 million 0 1 2 3 4 5 6 7 25 Years Annual-Payment Option $357,000 $196,000 G = $7,000 $189,000 $175,000 0 1 2 3 4 5 6 7 25 Years Figure 2.29 Cash flow diagram
So, what could be better than winning a SuperLotto Plus jackpot? Choosing how to receive your winnings! Before playing a SuperLotto Plus jackpot, you have a choice between getting the entire jackpot in 26 annual graduated payments or receiving one lump sum that will be less than the announced jackpot. (See Figure 2.29.) What would these choices come out to for an announced jackpot of $7 million?
• Lump-sum cash-value option: The winner would receive the present cash value of the announced jackpot in one lump sum. In this case, the winner would receive about 49.43%, or $3.46 million, in one lump sum (less tax withholdings).This cash value is based on average market costs determined by U.S. Treasury zero-coupon bonds with 5.3383% annual yield.
• Annual-payments option: The winner would receive the jackpot in 26 graduated annual payments. In this case, the winner would receive $175,000 as the first payment (2.5% of the total jackpot amount) immediately. The second payment would be $189,000. Over the course of the next 25 years, these payments would gradually increase each year by $7,000 to a final payment of $357,000.
If the U.S. Treasury zero-coupon rate is reduced to 4.5% (instead of 5.338%) at the time of winning, what would be the equivalent cash value of the lottery?
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