Question

Lottery Winnings: State sponsored lotteries are an extremely popular and highly successful method by which state governments raise the much needed funds for financing public expenses, especially education. Needless to say, they are also a very colorful part of everybody’s hopes of striking it rich. States often team up so that the member lotteries can offer higher jackpots to participants. Mega Millions is one of these games, where 44 lotteries team up to offer prizes of at least $12 million. Jackpots are rolled over and grow until someone wins. Mega Millions paid the record jackpot of US lotteries in March 2012, with a jackpot of $656 million, to three winning tickets from Kansas, Illinois and Maryland. The lottery carries two payment options to the winner. Winners can either opt to take 26 equal annual installments, or take the cash payout option at their share of $474 million. There is a 25% federal tax on lottery winnings and a 5% state tax for Kansas and Illinois and 8.75% state tax for Maryland on lottery winnings.-How much would the after-tax annual payment be for each winner?-Each one of these winners chose the cash pay-out option. Assuming a return of 5% a year, did they make the correct decision?-Is the lottery correct in advertising the jackpot at $656 million?-If the lottery would like to give the annuity option a chance at being selected, how do you think they should structure their payment plans? Any ideas?

Answer 1

F