In the United States many states sponsor 'lotteries' selling tickets at a price of $1 - $5 but with very large payoffs to the winners (of course the probability of a huge winning ticket is probably smaller than the chance you will get struck by lightning this year!). Another feature of the lottery winnings is that the state will spread the total winnings out for a number of years, e.g., 15 or 20 years. 

Suppose you have a winning ticket that says you have won $15 million ($15,000,000) but with the proviso that the payout to you will be $1 million ($1,000,000) for each year over a 15 year period. Your first 1 million dollar payment is tomorrow followed by 14 additional payments in each of the following 14 years. By the way, assume that your winnings will not be taxed under US or state tax laws (an assumption which actually is not correct!) 

1. If I were to purchase the winning ticket from you, explain why I would NOT be willing to pay you $15 million today. 

2. If after-tax returns on reasonably safe investments are earning about 6%, what is the present value of your winning ticket?

Answer rating: 100% (QA)

You would not be willing to pay 15 million today for the winning ticket because of the concept of th... View the full answer