Power Lotto Jackpot

In: Business and Management

Submitted By aziatic
Words 257
Pages 2
Powerball Lotto Jackpot

Lump Sum or Annuity.

*Historical Lump Sum Lottery Winner’s post win catastrophes and financial mismanagement aside.

A few of the main factors we need to consider are inflation, income tax and interest rate.

Firstly, Using the Present Value Function we can calculate the compound interest of the lump sum ($334.1m) in relation to the total value of the annuity payout ($500m).

Based on the PV Formula:

PV = FV/(1+i)n 334.1 = 500/(1+i)29 500/334.1 = (1+i)29 29√1.49 = 1+i 1.0139 – 1 = i Interest Rate = 1.4%

To meet the $500m Future Value of the annuity payout, Lucky Ducky would have to gain 1.4% compound interest on the lump sum settlement. If Lucky Ducky feels that he can beat a 1.4% interest rate with his own investments he will benefit from taking his chances with the lump sum.

Eg. If Lucky Ducky feels he can get 3% interest rate on his lump sum that would equal a FV of over $787m.

FV = PV x (1+i)n FV = 334.1 x (1+.03)29 FV = 334.1 x (1+.03)29 FV = 334.1 x 1.0329 FV = $787.32m

Inflation, Income tax on the lump sum vs. the annuity as well as investing the annuity differently will have to be considered as well. But for the bases of advice based on financial responsibility I would suggest Lucky Ducky to take the lump sum. Of course this does not consider…...

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