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Mavis Wanczyk (53) of Chicopee, MA was the sole winner of the $758.7 million Powerball jackpot on August 23, 2017. It was the largest jackpot prize won on a single ticket in U.S. lottery history. She was given the choice of either receiving a one-time lump sum payment of $480,500,936 upfront or an annuity. The annuity option distributes the jackpot of $758.7 million over 30 annual payments, which increase by 5% each year to keep up with the costs of living. The first payment of the annuity is paid immediately and the subsequent payments are paid at an annual frequency. Thus, the (undiscounted) sum of the annuity payments equals the jackpot amount of $758.7 million.
Problem a. What are the values of the first and the last payments of the annuity option?
Problem b. Compute the present value of the annuity payments if Mrs. Wanczyk has a discount rate of 4%.
Problem c. What considerations besides the present value computed above should Mrs. Wanczyk take into account when deciding between a lump-sum payment and the annuity? Make sure to give at least three reasons. State how these reasons would affect her choice between the lump-sum payment and the annuity.
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