Question

The $1.6 Billion Mega-millions winning lottery ticket is based upon the total amount of cash received if the annuity option is taken. The cash prize is $913,700,000 which you get immediately. The annuity option starts with a $ 24,082,300. payment now and then annual payments that are each 5% higher than the last payment for a total of 30 payments. Let’s complicate this further and model Federal (24%) and CT State taxes (7%) which take away from your earnings. a. Create a spreadsheet for the after-tax income detailing the income stream of the annuity option. How much do you get every year, both before & after tax, and how do the sums compare to the $1.6 Billion number? b. What is the present value of the annuity payment option assuming a 5% interest rate. Is this present value better or worse than the cash option from a present value perspective? The decision should be an “after tax” decision.