In our class example, I simplified the “annuity” prize option by assuming level, equal annual payments. Actually, this annuity prize option us now on an annuitized prize payment schedule with 26 beginning of year payments that start at a lower amount with each successive payment being 5% higher than the previous annual payment. The sum of these 26 annuitized payments equal the announced estimated jackpot amount with a lower one-time lump-sum payment also being available as the Cash Option. A recent Mega Millions estimated jackpot amount is $227 million which is the undiscounted sum of the 30 annuity option payments with a Cash Option of $134 million. The first payment under the Annuity Option which would occur immediately is $8,730,769 with 25 additional annual payments with each payment being 5% larger than the previous one. Using this information and assuming you demand a 4.5% annual return, would you prefer the Annuity Option or the Cash Option if you have the winning ticket? 

Include the following to support your decision:

 1. A complete schedule of all 26 annual payments under the Annuity Option.

 2. A comparison of the present value of all the payments under the Annuity Option and the present value of the Cash Option. 

3. Your decision.

Answer rating: 100% (QA)

Given First annual payment occurs immediately 8730769 Each subsequent annual payment is higher by 5 ... View the full answer