You have recently won the super jackpot in the Set

You have recently won the super jackpot in the Set for Life Lottery. On reading the fine print, you discover that you have the following two options:
a. You will receive 31 annual payments of $400,000, with the first payment being delivered today. The income will be taxed at a rate of 36 percent. Taxes will be withheld when the checks are issued.
b. You will receive $1,000,000 now, and you will not have to pay taxes on this amount. In addition, beginning one year from today, you will receive $325,000 each year for 30 years. The cash flows from this annuity will be taxed at 36 percent. Using a discount rate of 4.5 percent, which option should you select?

Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,...
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Related Book For answer-question

Corporate Finance Core Principles and Applications

5th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

ISBN: 978-1259289903

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