Question

You just won $1 million dollars in the lottery! They offer you two options for your winnings: a lump sum payment right now, or $100,000 a year over the next 10 years. Current 10-year interest rates are at 5%, and the current tax on lottery winnings is 40%. What is the amount you will receive today with the lump sum option

Answer 1

The amount received today is $600,000

Step-by-step explanation:

The amount received today with lump sum option is the amount won $1 million minus the tax on lottery winnings at 40%.

The amount receivable today based on the above statement is computed thus:

Lump received today $1,000,000

less tax at 40%*$1000,000 ($400,000)

Net amount $600,000

The amount received today is $600,00 after having deducted the necessary tax .

However, the other option may be more viable if the tax rate on lottery winnings is expected to be reduced.