John will be taxed on each of these payments at a rate of, Ask an Expert

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John Smith has just learned he haas won a $500,000 prize in the lottery. The lottery has given him two options for receiving payments:

(1)If John takes all the money today, the state and the federal governments will deduct taxes at a rate of 46% immediately.

(2)Alternatively, the lottery offers John a payout of 20 equal payments of $36,000 with the first payment occurring when John turns in the winning ticket.

John will be taxed on each of these payments at a rate of 25%. Assuming John can earn an 8% rate of returns (compounded annually) on any money invested during this period, which pay-out option should he choose? Please describe your reasoning.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M968560

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