Archibald Andrews has just learned that he won $1,040,000 in the lottery. Archie has three options for payment: Option A: a lump-sum payment of $1,040,000 right now, in which case 45% will be deducted for taxes. We do not know the level of Archie’s investment skills and therefore are unsure what rate of return he will earn on the lump sum. Option B: 20 equal annual payments of $72,000, the first to occur immediately. Taxes of 25% of will be deducted from each payment. Assume an inherent interest rate of 8% APR. Option C: 36 equal semi-annual payments of $36,000, the first to occur in exactly one year. Taxes of 15% will be deducted from each payment. For this option, assume interest of 8% APR, compounded semi-annually. Calculate the present value of each option A, B, and C.
Archibald Andrews has just learned that he won $1,040,000 in the lottery. Archie has three options for payment:
Option A: a lump-sum payment of $1,040,000 right now, in which case 45% will be deducted for taxes. We do not
know the level of Archie’s investment skills and therefore are unsure what
Option B: 20 equal annual payments of $72,000, the first to occur immediately. Taxes of 25% of will be deducted
from each payment. Assume an inherent interest rate of 8% APR.
Option C: 36 equal semi-annual payments of $36,000, the first to occur in exactly one year. Taxes of 15% will be
deducted from each payment. For this option, assume interest of 8% APR, compounded semi-annually.
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