Question

Two part question

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?

Sorry, you didn’t win the lottery, but here’s a way you can still be a millionaire! Starting at age 22, every night you take $5 out of your pocket and put it in a manila envelope (title it “Lottery Winnings”). At the end of the year, you place the money from the envelope in a stock fund with an average interest rate of 10%. 

How much will you have in the account when you retire at age 65?

What would be different if you started this plan later in your life?

Answer 1

Using Interest rate of 5% we can say that I will choose lumpsum of 1 million today because after deducting tax of 40% If I will invest remaining 600000 for 10 year, I will get a maturity amount of 977336.78 where as If I would have choose payment of 100000 per year then with the same interest rate of 5% after deducting 40% tax my Future value would have been 754673.5.

And if there is no tax on annual payment I would have choose payment of 100000 per year.