Reese Feldman just found out he won $1,000,000 from the lottery. He has two opti

Question

Reese Feldman just found out he won $1,000,000 from the lottery. He has two options for receiving the prize. First, if he takes the money today, the state and federal government will take out 47% immediately. His second option is to receive a payout of 20 equal installments of $72,000 with the first payment occurring when Reese turns in the winning ticket. Each of these payments will be taxed at a combined state and federal rate of 27%. Assuming Reese can earn a 4% rate of return on any money invested during this period, which option should he choose? Why? Show your work. For the amortization schedules be sure to print the schedule so all columns fit on one page. I'd like to know how to get this done using the Financial Calculator or Excel, so I wanted to know wha the values of the FV, PV, PMT , N , I is.

Explanation / Answer

PV of first option = 1000000*(1-0.47) = $ 5,30,000.00 PV of the second option: Equal payments net of tax = 72000*(1-0.27) = $     52,560.00 Presuming that the lottery winning ticket is turned in immediately, the 20 receipts occur at the beginning of each year, which means it is an annuity due. PV of the annuity due at 4% = 52560*1.04*(1.04^20-1)/(0.04*1.04^20)= $ 7,42,879.85 CHOICE: Reese Feldman should choose the second option of receiving 20 equal instalments as its PV is more.

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