what is the minimum amount she should be willing to accept today as a lump-sum payment?
Posted by MarkAug 28
Lorraine Jackson won a lottery. She will have a choice of receiving ,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 percent on any investment she makes, what is the minimum amount she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.)
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$25000 over 30 years is $750,000. But then you must pay taxes as well. If you take the lump sum, you will pay the taxes up front, then simply pay capital gains tax on the interest or dividends earned throughout the lifetime of the balance. Typically a lump sum will attribute 40% to taxes. If the amount won is $750,000, you should figure a cash value of 500,000 minus 40% which will be 300,000.
Then investing that $300,000 over time, should be able to yield more than 750,000 over the same time frame if invested properly.