Reference no: EM132906721
Albert Einstein reportedly said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." Regardless of whether Einstein uttered these exact words, the essence of his statement is still immensely powerful and cannot be disputed. For anyone who wants to build lasting wealth, understanding and harnessing the power of compound interest is essential. For the more visual of you, imagine, if you will, building the bottom part of a snowman. It starts with a snowball (or initial investment). You roll it around in the snow and it slowly gets bigger (interest on the investment). A slow and monotonous process until something wonderful becomes apparent - the snowball not only gets bigger and bigger, but at a faster and faster rate (interest on the interest).
Your friend, Mike Szyslak wants be a millionaire, and he found several ways applicable. But he is still hesitating among the various options and comes to you for financial advice. Complete each of the options, below, with your group.
Problem 1: He is considering to buy Mega Millions lottery using his $65,000 deposit in the saving account. If the current federal tax rate on earnings of lottery is 25%, and the state tax is 8.82%, and he won one million on a lottery in Florida. How much can he get after tax if the payout was a lump sum? What is the amount per year over a 30-year period if the payout was an annuity? Assume his required rate of return is 5%, what will be the future values of the lump sum option and the annuity option in 30 years, respectively?