Howie Long has just learned he has won a $500,000 prize in the lottery. The lottery has given him two 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%." Instructions:Assuming Howie can earn an 8% rate of return (compounded annually) on any money invested during this period, which pay-out option should he choose? Step 1: Determine of single payment cash yield Step 2: Determine the present value of an annuity due: Cash payment is: Tax burden is: Annual cash yield is:
Howie Long has just learned he has won a $500,000 prize in the lottery. The lottery has given him two 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%."
Instructions:Assuming Howie can earn an 8%
Step 1: Determine of single payment cash yield
Step 2: Determine the present value of an
Cash payment is:
Tax burden is:
Annual cash yield is:
In the given case, the person has won a $500000 prize and has been offered two options: either to receive the payment immediately or by installments. Analyzing the two options, one has to choose the best. The realized amount can be deposited, and a rate of return of 8% compounded annually can be obtained. Yield means certain amount earned from the principal amount over a particular period of time. it is decision making tool for the investor to make an investment.
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