Which pay-out option should he choose

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Reference no: EM13140054

John Smith has just learned he haas won a $500,000 prize in the lottery. The lottery has given him two options for receiving payments: (1)If John takes all the money today, the state and the federal governments will deduct taxes at a rate of 46% immediately. (2)Alternatively, the lottery offers John a payout of 20 equal payments of $36,000 with the first payment occurring when John turns in the winning ticket. John will be taxed on each of these payments at a rate of 25%. Assuming John can earn an 8% rate of returns (compounded annually) on any money invested during this period, which pay-out option should he choose? Please explain your reasoning.

Reference no: EM13140054

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