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Compute present value of the cash flows for lump sum payout

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Question - Newman Long has just learned he has won a $501,400 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Newman takes all the money today, the state and federal governments will deduct taxes at a rate of 47% immediately. (2) Alternatively, the lottery offers Newman a payout of 20 equal payments of $36,700 with the first payment occurring when Newman turns in the winning ticket. Newman will be taxed on each of these payments at a rate of 26%.

Compute the present value of the cash flows for lump sum payout.

Assuming Newman can earn an 8% rate of return (compounded annually) on any money invested during this period, compute the present value of the cash flows for annuity payout.

Which pay-out option should he choose?

Reference no: EM132614159

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