Howie
Long has just learned he has won a $500,000 prize in the lottery.
P6-4 (Evaluating Payment Alternatives) Howie Long has just learned he has won a $500,000 prize
in the lottery. The lottery has given him two options for receiving payments:
(1) If Howie 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 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?
TUTORIAL
PREVIEW
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?
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Step 1: Determine of single payment cash yield:
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$270,000
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