Benefit Cost Analysis

This year’s big, big lottery powerball super jumbo prize was something on the order of $750M. Of course, the dirty little secret is that this comes in twenty five annual payments of $30M each. While that’s nothing to sneeze at, newspaper reports of a $750M prize seem misinformed at best, and maybe even fraudulent.

A. Calculate the present value of this stream of payments using a range of interest rates ranging, say, from 0% to 20%.

B. Holding the interest rate constant, how might an unscrupulous lottery official minimize the value of a “$750M prize” to be made in a series of equal annual payments? Would you consider it fraudulent to advertise such a prize using the term, “$750M”?

C. According to OMB Circular A-94 and its guidelines for discounting, what are appropriate values to attach to this stream of payments, or can you tell for sure? Please explain why or why not, and be real careful when you do.