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What is the present value of winnings

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You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options:

Option a. You will receive 31 annual payments of $170,000, with the first payment being delivered today. The income will be taxed at a rate of 28 percent. Taxes will be withheld when the checks are issued.

Option b. You will receive $585,000 now, and you will not have to pay taxes on this amount. In addition, beginning one year from today, you will receive $120,000 each year for 30 years. The cash flows from this annuity will be taxed at 28 percent.

Question 1: Using a discount rate of 7 percent, what is the present value of your winnings for each option?

Reference no: EM132472479

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