Question

In: Finance

Group 1: You won $5,000,000 in the Massachusetts Lottery's Halloween Bonanza game. It pays out 10...

Group 1: You won $5,000,000 in the Massachusetts Lottery's Halloween Bonanza game. It pays out 10 years from now. How much is it worth today?

Group 2: You won a similar prize, but it pays out $500,0000/yr for the next 10 years.

Group 3: You won a prize that pays out $600,000/yr for the next 15 years.

Groups, what is your prize worth today assuming a 2% interest rate? Which prize would you rather receive assuming it is taxable at a 55% tax rate? Please explain your answer with all calculations.

Expert Solution

Group 1

Present value factor of 10 years at 2% = 1/(1+r)^10 = 1/(1.02)^10 = 0.820348299875155

After tax price received = 5,000,000 * (1-tax rate) = 5,000,000 * (1-55%) = 2250000

Present value of winning = After tax winning * present value factor = 2250000 * 0.820348299875155 = 1845783.67

Group 2

Accumulated present value factor for 10 years = (1- (1+r)^^-n)/r

= (1-(1.02^-10))/.02 = 8.98258500624223

After tax annuity for 10 years = 2250000

Prsent value of annuity = 2250000 * 8.98258500624223 = 20210816.26

Group 3

Annuity present value factor for 15 years = (1-(1.02^-15))/.02 = 12.849263500574

Annuity = 600000

After tax annuity = 600000 * (1-55%) = 270000

Present value of annuity = 270000 * 12.849263500574 = 3469301.15

Summary : present value of prices

Group 1 = 1845783.67

Group 2 = 20210816.26

Group 3 = 3469301.15

From the above present values I would rather have second price.

Note : group 2 price pays $500,0000/yr for the next 10 years, which is very evidently more than other 2, it could have been an confusion, please check if it is actually $500,0000/yr for the next 10 years or $500,000/yr for the next 10 years.

jeff jeffy answered 2 hours ago

You have just won a $3,900,000 lottery which pays out $130,000 at the beginning of every...

You have just won a $3,900,000 lottery which pays out $130,000 at the beginning of every year for 30 years. If the required rate of return on lottery winnings is 7.5%, then how much did you win (i.e. at what price are you willing to sell your winnings for)?

1. Assume I won 50 million dollars in a lottery that pays installments of 10 million...

1. Assume I won 50 million dollars in a lottery that pays installments of 10 million dollars a year for five years or a lump sum of less than 50 million dollars. If I take the installments, my first installment would come the day I claimed my winnings at the state lottery office. If I take the lump sum, I would receive that payment the day I claimed my winnings at the state lottery office. Assume that the interest rate...

Consider the following game: You start with $1. The game is over when you run out...

Consider the following game: You start with $1. The game is over when you run out of money. You flip a coin-----Heads means that you win $1 and Tails means that you lose $1 What is the probability that the game will end after: a. 1 flip of the coin? b. 2 flips of the coin? c. 3 flips of the coin? d. 4 flips of the coin? You can set up a tree diagram. You can show your explained...

You are considering two different payment plans for the lottery you just won. Option 1 pays...

You are considering two different payment plans for the lottery you just won. Option 1 pays $10,000 today and Option B pays $20,000 at the end of ten years. Assume you can earn 6.5 percent on your savings. Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different..

You have just won a $5,000,000 lottery! You can collect $3,000,000 now or wait 5 years...

You have just won a $5,000,000 lottery! You can collect $3,000,000 now or wait 5 years to collect the full amount. Assume an APR of 5%. Which is the best alternative?

You just won the 1 million dollar lottery! However the state will be paying it out...

You just won the 1 million dollar lottery! However the state will be paying it out to you in 20 annual $50,000 payments. If the inflation rate averages 4% over that time period how much would be the present value if you could receive an equivalent amount up front in a lump sum.

31) Suppose you just won a small lottery that pays you 20,000 at the beginning of...

31) Suppose you just won a small lottery that pays you 20,000 at the beginning of each year for three years. The lottery is also willing to pay you an all-at-once payment of $57,000 today instead of 20,000 per year at the beginning of each year. If the interest rate is at 9 percent, should you take the all-at-once payment of $57,000 or $20,000 per year at the beginning of each year? Group of answer choices Take the three-year payments,...

Consider a gambling game where a player pays $10 to play with a 40% chance of...

Consider a gambling game where a player pays $10 to play with a 40% chance of winning $20, 40% chance of winning $1, and a 20% chance of winning $0. (a) If the player’s utility function is U(M) = M, what is the expected utility from playing the game? How does it compare to the player’s utility of not playing the game, i.e. having $10 for sure? Is the player risk-neutral, risk-loving, or risk-averse, and does the player play? (b)...

A friend offered to play a game with you where you select 1 marble out of...

A friend offered to play a game with you where you select 1 marble out of 100: 40 red 30 blue 20 yellow and 10 green. If you pick a red marble you lose $1, if you pick a blue you win $2, if you pick a yellow you lose $5 if you pick a green you win $10. Each time you pick a marble it will go back into the bag. Round to 2 decimals and show work. a)...

1. Assume I won 5 million dollars in a lottery that pays installments of 1 million...

1. Assume I won 5 million dollars in a lottery that pays installments of 1 million dollars a year for five years or a lump sum of less than 5 million dollars. If I take the installments, my first installment would come the day I claimed my winnings at the state lottery office. If I take the lump sum, I would receive that payment the day I claimed my winnings at the state lottery office. Assume that the interest rate...