Hrm/531 Week 6 Assignment

Question 1: If you were one of the winners, which option would you select? Why?
Answer 1: Lottery Prize = $ 181,500,000 as 2 winner for 363 million jackpot.
To decide the best option, we will compare the Present value of cash flow in both options. Taxes are ignored, as they will be applied in both the options.
Option A: Lump-Sum/Cash-option payment:
Lottery will pay 50% of published value, if cash option is selected and federal
Cash before taxes = 181,500,00 * 0.50 = $90,750,000
Option B: Annuity of 26 years.
Under annuity option, Lottery takes all the money and invests to fund in 26-years annuity and gives payments to winner.
Lottery invests 50% of 181,500,000 (present cash value of lump-sum amount) and Lottery received rate of interest of 4%, using calculator: N=26, I/Y = 4,
Payment = $ 5,677,989.78 ( per year). Payment (Before Tax) = $ 5,677,989.78 ( per year)
Total Tax = .28 +.042 = 0.322
Cash after Taxes = 5,677,989.78 * (1 – 0.322) = $ 3,849,677.07 (per year).

Question 3: Is the State of Michigan justified in advertising the prize amount as 363 million? Explain.
Answer 3: No, as the Present cash value of the Lottery is only 50% of published value 363 million i.e. 181.5 million.

Question 4: If the only option available was an annuity payment plan, what could Larry do to maximize the value of his winning assuming that the risk-free rate of interest is 5%.
Answer 4: The value of annuity plan is maximized by increasing its present value. Present value of Annuity = C * [ ( 1- ( 1/ (1+r) n ) / r ]
Larry calculate the annuity payment, using the discount rate 5% and lump-sum amount as Present values for 26 year then Larry will receive the annuity payment will be equivalent to receiving lump-sum amount.
N=26, PV= 90,750,000, I/Y=5, FV =0 CPT PMT=