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18 November, 07:48

Who Wants to Be a Millionaire?

You just won $1 million dollars in the lottery! They offer you two options for your winnings: a lump sum payment right now, or $100,000 a year over the next 10 years. Current 10-year interest rates are at 5%, and the current tax on lottery winnings is 40%.

What is the amount you will receive today with the lump sum option?

Which option would you select? How would you present your argument for your decision in a debate?

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Answers (2)
  1. 18 November, 09:50
    0
    Take $100,000 a year over the next 10 years

    Explanation:

    Current tax rate is 40 %

    40 % 0f 1 million = 40/100 * 1,000,000 = 400,000 $

    Amount actually received will be $600,000

    Interest rates are 5 %

    5% of 100,000 = 5/100 * 100,000 = 5000$

    If we take 1 lac $ over the next ten years we will pay $5000 as interest.

    $5000 multiplied by 10 will be $50,000

    and $50,000 is much less than $ 400,000
  2. 18 November, 10:06
    0
    using the lump payment the winner will receive $600000 today I would prefer the option 2 which involves part payment of $100000 yearly over 10 years because the interest rate over the years is lower which leads to the winner having receive a higher amount at the end of the payment period than the payment received using the lump sum payment.

    Explanation:

    The current tax on lottery winnings is 40%

    40% of $1000000 = 0.4 * $1000000 = $400000

    remaining amount = ($1000000 - $400000) = $600000

    with the option 1 which is the lump sum payment the winner of the lottery will receive = $600000 after tax has been deducted

    Option 2

    $100000 per year for 10 years at 5% interest rate per year

    5% of $100000 = 0.05 * $100000 = $5000

    in 10 years time the total interest paid will be

    $5000 * 10 years = $50000

    with Option 2 the total money received in 10 years by the winner will be

    $1000000 - $50000 = $950000
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