You have just won the $1,000,000 in the lottery. You have the option of taking a...

You have just won the $1,000,000 in the lottery. You have the option of taking a lump sum payout or equal annualized payments over 20 years. Ignoring any tax consequences; how much should you expect from the annualized payments. What target interest rate would make the annualized payments more valuable than the lump sum. In your response, you may want to consider such issues as inflation, investing lump sum in stock market (What have been the long-term historic returns?) to generate your own annualized payment schedule, as well as the psychological components – receiving a $1,000,000 check.

Expert Solution

It seems quite good as 1M amount is too big to get immediately but there will be lesser benefits opposed to annualized payments. Also the annualized payments can be further invested in Bond/Fixed deposits/Share portfolio/investment carriers etc

If I won $1,000,000 in the lottery I would go for equal annualized payments over 20 years. I would keep a target interest of 10% as it neither too high nor too low for an ideal annualized payments. Lets consider the inflation aroud 6% and Stock market average return of 5%.

We can see above that Compounded amount on lumpsump at 8% interest rate would be much better than stocks (with complete loss potential). Inflation is calculated at 2.5% annual for 20 years.

Son will still save $233,048-$81,931 = $151,117*20 = $3M approximate

jeff jeffy answered 2 years ago

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