1. John Long has just learned he has won a $511,700 prize in the lottery.The lottery has given him two options for receiving the payments. (1) If John takes all the money today, the state and federal governments will deduct taxes at a rate of 47% immediately. (2) Alternatively, the lottery offers John a payout of 20 equal payments of $42,100 with the first payment occurring when John turns in the winning ticket. John will be taxed on each of these payments at a rate of 26%.

Compute the present value of the cash flows for lump sum payout.

Lump sum payout

Assuming John can earn an 11% rate of return (compound annually) on any money invested during this period, compute the present value of the cash flows for annuity payout.

Present value of annuity payout

Which pay-out option should he choose