Indifferent between the two options

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Reference no: EM131825293

You have just won the (first ever) US Government Sweepstakes. The government has two payment options from which you can chose:

a. You will receive forty annual payments of $300,000 with the first payment beginning today. All of this income will be taxed at a 35% rate. Taxes will be deducted when the payments are made to you.

b. You will receive a lump-sum payment now and you will not have to pay any income tax on this amount. Then, beginning one year from now you will receive $200,000 annually for thirty- nine years. You will have to pay a 35% tax rate on this income as the payments are made to you.

Required: Assuming that your required rate of return is 10% per annum, how much would the lump-sum payment have to be so that you would be indifferent between the two options? Remember, it is not what you earn, but what you keep that matters.

Reference no: EM131825293

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