CHAPTER 5

1. If I were one of the winner, I would se;ect the lump-sum option. If I select the lump-sum option
the BIG Jackpots pay me $90.75 Million over the total value money that I win $181.5 Million. If I
select the annuity option, I would received $6.69 Million per year over 26 year. That means I will
received $173.94 million for the total over 26 year. After tax I would received from the lump-
sum option is $83.13 Million and annuity option is $6.69 Million. The value of lump-sum tha I
received is more satisfied than the value of annuity because the princip of time value of money
said that the value of money now would not same of future value.

2. PV = (PVIFAi%, nyrs) (1+i)

= 6.981 (PVIFA 4.2% , 26) (1 + 4.2)

= 6.981 (15.64) (1.o42)

= 109.18 (1.042)

= 113.77

Value per year : 113.77 / 26 year

= 4.38 Million peryear

:. For the annuity plan it sound like good investment for those didn’t understand about
the time value of money compare with the cash option plan. But if we understand about the
time value of money actually the cash option plan 0.343 is more better because the total
investment if we choose the annuity plan is less than cash option plan.

3. Yes. This is because the prise amount $363 million is the record for the largest lottery jackpot
ever in the United State. That fact can make more people interest to play jackpot and try the
best to win $363 million or more to make a new record of the largest lottery jackpot ever in
United State.

4. FV = PMT (FVIFA i , n)

= 4.38 [( 1 + 0.05) ^26 – 1]

_______________
0.05
= 4.38 (51.11)
= 223.86
 To maximize the value of his winnings Larry should to invest the money that he received from
Michigan Lottery. If he invests all of the money than he received, the money can grow so this is
can maximize the value of his winnings. Let’s say we assume that he received $4.38 million every
year and he save all of the money. The end of his investment that 26 year, he can receive about
$223.86 million if the rate is 5%. So the total money if he invests all the money than he received
is more than the total of money that he wins actually.

5. The most winner select the cash option plan because the winner can received more satisfied if
they received a cash payment. Furthermore the winner not have to bear the risk of higher tax.
The annuity plan have many tax so the winner will bear received the risk of higher tax payments
for each year. From this statement, why not many winners select the cash option when they
have a choice. Beside that, the annuity plan it sound like a good investment for those didn’t
understand about the time value of money compare with the cash option plan. But if we
understand about the time value of money actually the cash option plan is more better than the
annuity plan because the total investment we will received if we choose the annuity plan is less
than cash option plan. This is because the principle of time value of money state a dollar
received is worth more than a dollar received in the future.
6. If Michigan lottery would like to give the annuity option an equal chance of being selected, it
would select the ordinary annuity. Ordinary annuity is annuity in which the payment occur at
the end of each period. Because In finance, ordinary annuities are use much more frequently
than are annuity due.