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?

Answer 1

Answer:

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

               

Answer 2

Answer:

• 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