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Question: Alan Long has just learned he has won a $511,500 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Alan takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. (2) Alternatively, the lottery offers Alan a payout of 20 equal payments of $37,900 with the first payment occurring when Alan turns in the winning ticket. Alan will be taxed on each of these payments at a rate of 25%

Compute the present value of the cash flows for lump sum payout. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Assuming Alan can earn an 9% rate of return (compounded annually) on any money invested during this period, compute the present value of the cash flows for annuity payout. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Which pay-out option should he choose?

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Accounting Basics, Accounting

Category:- Accounting Basics
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