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Question

You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options:

  

You will receive 31 annual payments of $280,000, with the first payment being delivered today. The income will be taxed at a rate of 28 percent. Taxes will be withheld when the checks are issued.

You will receive $560,000 now, and you will not have to pay taxes on this amount. In addition, beginning one year from today, you will receive $230,000 each year for 30 years. The cash flows from this annuity will be taxed at 28 percent

a.

You will receive 31 annual payments of $280,000, with the first payment being delivered today. The income will be taxed at a rate of 28 percent. Taxes will be withheld when the checks are issued.

 

 

b.

You will receive $560,000 now, and you will not have to pay taxes on this amount. In addition, beginning one year from today, you will receive $230,000 each year for 30 years. The cash flows from this annuity will be taxed at 28 percent

 

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