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15) O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. If O'Reilly wins the jackpot, he has a choice of receiving $200 million in five years or a smaller lump sum now. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why? Use Exhibit 3.1. a. O'Reilly's after-tax return is 10 percent. If he chooses the current lump-sum option, the lottery will pay him $130 million. b. O'Reilly's after-tax return is 10 percent. His current tax rate will be 35 percent if he receives the lottery payment now. His expected tax rate in five years will be 40 percent. If he chooses the current lump-sum option, the lottery will pay him $100 million.ear 4% 5% 6% 7% 9% 10% 11% 12% 962 952 943 935 926 917 909 901 893 925 .907 890 .873 .857 .842 826 .812 797 3 889 .864 840 .8

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  1. If O’Reilly chooses the existing lump sum decision, he would get $130 million.

The PV of $200 million received after 5 years would be worth $124.2 million ((Discount Factor, five years, 10%) i.e., $200 million*0.621).

Therefore, O’Reilly must choose the existing lump sum $130 million option.

  1. If O’Reilly chooses the existing lump sum decision, he would get $100 million before tax & $65 million after deducting 35% tax.

If he selects the other option of $200 million after 5 years, he would get $120 million after deducting 40% tax in 5 years. PV of $120 million is means $74.52 million (Discount Factor, Five years, 10%)). i.e., $120 million*0.621

O’Reilly must choose $200 million after 5 years option.

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