America’s Got Talent $1M Prize: What Do You Really Get?

If you are the America’s Got Talent finalist, you have two options for accepting the prize money of $1,000,000. You can either

Option A: Receive the prize money in even annual payments over 40 years, or Option B: Receive a one-time, lump sum payment

a.) If the winner chooses Option A, what is their annual payout? (This is basically an annuity). Explain your work by identifying which formula you are using from the Math of Finance Formula Sheet and what values you are using in the formula. You can simply say “Using formula #1, where P = 1, m = 2, etc”. You do not need to show step by step calculations.

b.) If the winner chooses Option B, and the lump sum is compounded annually at 3%, what would the one-time payment be worth? In other words, what is the present value of the prize money (future value) compounded at 3%? Explain your work as described in question

c.) The payouts in parts a and b are pretax values. All prize money is taxable because it is considered income. Tax rates are based on the total annual income for that year. In other words, you get taxed based on the sum of your annual income (from your job) and any prize money you received that year. Assume you have a day job and earn $45,000 annually. If you file your taxes as “single”, what would be your after tax annual income if you chose Option A? Explain your work as described in question 1. (Refer to the tax bracket schedule below. Taken from the IRS website. )

IRS Individual Income Tax Bracket https://www.irs.com/articles/2018-federal-tax-rates-personal-exemptions- and-standard-deductions

Single

Taxable Income	Tax Rate
$0 – $9,525	10% of taxable income
$9,526 – $38,700	$952.50 plus 12% of the amount over $9,525
$38,701 – $82,500	$4,453.50 plus 22% of the amount over $38,700
$82,501 – $157,500	$14,089.50 plus 24% of the amount over $82,500
$157,501 – $200,000	$32,089.50 plus 32% of the amount over $157,500
$200,001 – $500,000	$45,689.50 plus 35% of the amount over $200,000
$500,001 or more	$150,689.50 plus 37% of the amount over $500,000

d.) What would be the after tax income for the year if you chose Option B under the same conditions? Explain your work as described in question 1

Answer rating: 100% (QA)

a The annual payout for Option A would be 25000 This is calculated usi... View the full answer