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Compute the present value of cash flows for annuity payout

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Tony Long has just learned he has won a $509,800 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Tony takes all the money today, the state and federal governments will deduct taxes at a rate of 48% immediately. (2) Alternatively, the lottery offers Tony a payout of 20 equal payments of $38,400 with the first payment occurring when Tony turns in the winning ticket. Tony will be taxed on each of these payments at a rate of 25%.

Problem 1: Compute the present value of the cash flows for lump sum payout.

Problem 2: Assuming Tony can earn an 10% rate of return (compounded annually) on any money invested during this period, compute the present value of the cash flows for annuity payout.

Reference no: EM132704712

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