Earlier this week the Big Game Lottery jackpot hit $351 million. The winner(s) will get $13.5 million a year for 26 years (with the first payment at time zero). But the winner(s) will have to pay income taxes. After taxes, if there is a single winning ticket, the winner can choose a one-time payoff of $114 million or $8.9 million a year for 26 years (with the first payment at time zero).

1. What is the embedded rate of return associated with the two alternative modes of payoff?

2. Assume you won the Big Game Lottery and wanted a payoff over time. If you thought you could earn 5 percent after-tax on invested funds, would you rather take the one-time $114 million or the $8.9 million per year? Why?

Answer rating: 100% (QA)

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