Howie Long has just learned he has won a $500,000 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Howie takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. (2) Alternatively, the lottery offers Howie a payout of 20 equal payments of $36,000 with the first payment occurring when Howie turns in the winning ticket. Howie will be taxed on each of these payments at a rate of 25%. Assuming Howie can earn an 8% rate of return (compounded annually) on any money invested during this period, compute the present value of the cash flows for annuity payout.

Howie Long has just learned he has won a $500,000 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Howie takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. (2) Alternatively, the lottery offers Howie a payout of 20 equal payments of $36,000 with the first payment occurring when Howie turns in the winning ticket. Howie will be taxed on each of these payments at a rate of 25%. Assuming Howie can earn an 8% rate of return (compounded annually) on any money invested during this period, compute the present value of the cash flows for annuity payout.

SWFT Comprehensive Volume 2019

42nd Edition

ISBN:9780357233306

Author:Maloney

Publisher:Maloney

Chapter16: Accounting Periods And Methods

Section: Chapter Questions

Problem 35P

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(Evaluating Payment Alternatives) Howie Long has just learned he has won a $500,000 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Howie takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. (2) Alternatively, the lottery offers Howie a payout of 20 equal payments of $36,000 with the first payment occurring when Howie turns in the winning ticket. Howie will be taxed on each of these payments at a rate of 25%.InstructionsAssuming Howie can earn an 8% rate of return (compounded annually) on any money invested during this period, which payout option should he choose?
Howie Long has just learned he has won a $500,000 prize in the lottery. The lottery has given him two options for receiving the payments: (1) If Howie takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. (2) Alternatively, the lottery offers Howie a payout of 20 equal payments of $36,000 with the first payment occurring when Howie turns in the winning ticket. Howie will be taxed on each of these payments at a rate of 25%."Instructions:Assuming Howie can earn an 8% rate of return (compounded annually) on any money invested during this period, which pay-out option should he choose? Step 1: Determine of single payment cash yield Step 2: Determine the present value of an annuity due: Cash payment is: Tax burden is: Annual cash yield is:
Morgan John has just learned he has won a $2,800,000 prize in the state lottery. He has two options for receiving the payments: (1) If Morgan takes all the money today, the state and federal governments will deduct taxes at a combined rate of 40% immediately. (2) Alternatively, the lottery offers Morgan a payout of 20 equal payments of $199,900 with the first payment occurring when Morgan turns in the winning ticket. Morgan will be taxed on each of these payments at a rate of 30%. Assuming Morgan can earn an 6% rate of return (compounded annually) on any money invested during this period. Hick here to view factor tables Compute the present value of the cash flows for the lump sum payout. Lump sum payout $ Compute the present value of the cash flows for the annuity payout. (Round factor values to 5 decimal places, eg. 1.25124 and final answer to O decimal places, eg. 458,581) Present value of annuity payout $ Which pay-out option should he choose? SUPE
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