Question

Suppose you win the lottery when the jackpot amount is $162 million. You can receive the jackpot amount paid out evenly over 26 years or you can elect to take an immediate payment of $95 million, before taxes. Ignore all tax effects. Considering this scenario, which option is most advantageous and why? (Be specific as to any calculations performed.) What other factors should be considered in making your decision?

Important Note: Please be sure your response is based on our course concepts: the time value of money. Your post should include calculations for both payout options using the time value of money, explain your assumptions, and interpret the results of your calculations. You may also discuss any and all other factors that will impact the decision as to which type of payout option you would choose but only after you have completed the calculations necessary to support your response.

Answer 1

Period	Amount	PV Factor	PV
	(million)	1/ (1+Interest%)^Period	Amount X PV Factor
1	$      6.231	0.95	$                             5.93
2	$      6.231	0.91	$                             5.65
3	$      6.231	0.86	$                             5.38
4	$      6.231	0.82	$                             5.13
5	$      6.231	0.78	$                             4.88
6	$      6.231	0.73	$                             4.52
7	$      6.231	0.69	$                             4.28
8	$      6.231	0.65	$                             4.06
9	$      6.231	0.62	$                             3.85
10	$      6.231	0.59	$                             3.65
11	$      6.231	0.53	$                             3.28
12	$      6.231	0.50	$                             3.10
13	$      6.231	0.47	$                             2.92
14	$      6.231	0.44	$                             2.76
15	$      6.231	0.42	$                             2.60
16	$      6.231	0.37	$                             2.27
17	$      6.231	0.34	$                             2.14
18	$      6.231	0.32	$                             2.01
19	$      6.231	0.30	$                             1.88
20	$      6.231	0.28	$                             1.77
21	$      6.231	0.24	$                             1.50
22	$      6.231	0.23	$                             1.41
23	$      6.231	0.21	$                             1.31
24	$      6.231	0.20	$                             1.23
25	$      6.231	0.18	$                             1.15
26	$      6.231	0.17	$                             1.07
			$                           79.73

I have taken the following assumptions here

1. I have discounted it using the following rates
1-5 Years at 5% (current average bank deposit rate in my country)
6-10 Year at 5.5% (assuming minimum increase and inflation impact)
11-15 Year at 6% (assuming minimum increase and inflation impact)
16-20 Year at 6.5% (assuming minimum increase and inflation impact)
21-26 Year at 7% (assuming minimum increase and inflation impact)

The amount is 162/26 = $6.231 million

The following are the options available
1. Upfront receipt of $95 million
2. $162 million spread evenly over 26 years

I would rather go for the first option of an upfront payment. If I invest $95 million and assume a constant interest rate of 5% per annum my $95 million will be worth $337.8 million at the end of 26 years [95 X (1 + 5%)^26]

So in comparison $95 million upfront is a way better option.