Question

Who Wants to Be a Millionaire?

1. You just won $1 million dollars in the lottery! They offer you two options for your winnings: a lump sum payment right now, or $100,000 a year over the next 10 years. Current 10-year interest rates are at 5%, and the current tax on lottery winnings is 40%.  
   • What is the amount you will receive today with the lump sum option?
   • Which option would you select? How would you present your argument for your decision in a debate?
2. Sorry, you didn’t win the lottery, but here’s a way you can still be a millionaire! Starting at age 22, every night you take $5 out of your pocket and put it in a manila envelope (title it “Lottery Winnings”). At the end of the year, you place the money from the envelope in a stock fund with an average interest rate of 10%.
   • How much will you have in the account when you retire at age 65?
   • What would be different if you started this plan later in your life?

Answer 1

option 1 - $10,00,000

Post tax = $6,00,000

option 2 - $1,00,000 next 10years

post tax amount = 60,000

PV in excel formula = pv(5%,10,-60000,0,0)

PMT	100000
Years	10
tax rate	40%
Tax deduction	40000
post tax deduction	60000
Present value(PV)Excel	$463,304.10

Amount received in lummpsum today = $463304

I would choose option A, considering the interest rate and value which I receive on the yearly payment

Case b.

Haven't won the lottery

Started investing $5 from age 22 till age 65

Tenure = 43

Amount(PMT) = $5

Periodic payments(PMT)	5
Years(NPER)	43
Interest on stock(Rate)	10%
Future value(FV) in Excel	$2,962.00

Future Value(10%,43,-5,0,0)

if you have started later the value of money or the future value is less compared to starting early

if you start saving from age 32, the fv would be

$1,111.26= FV(FV(10%,33,-5,0,0)

If you start from age 42,

$397.72==FV(10%,23,-5,0,0)

So the savings would be less if you start investing late