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Which pay out option should he choose

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1. (Evaluating Payment Alternatives) Terry O'Malley has just learned he has won a $900,000 prize in the lottery. The lottery has given him two options for receiving the payments: 

(1) If Terry takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. 

(2) Alternatively, the lottery offers Terry a payout of 20 equal payments of $62,000 with the first payment occurring when Terry turns in the winning ticket. Terry will be taxed on each of these payments at a rate of 25%.

Assuming Terry can earn an 8% rate of return (compounded annually) on any money invested during this period, which pay-out option should he choose? 

Reference no: EM131105597

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