You like to buy lottery tickets every week. The lottery pays an insurance company that pays the winner an annuity. If you win a $60,000,000 lottery and elect to take an annuity, you get $3,000,000 per year at the beginning of each year for the next 20 years.
a. How much will the state have to pay the insurance company if money can earn 3 percent?
b. How much interest is earned on this lump-sum payment over the 20 years?
c. If you take the cash, rather than the annuity, the state pays you $30,000,000 in one lump sum today. You must pay 40 percent of this in taxes. If you are currently working and invest this money at 6 percent, how much money will you have in a mutual fund at the end of 20 years?
d. Are you better off with the annuity or should you take the cash? Explain.

  • CreatedJuly 31, 2015
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