James Has Just Won the Lottery After Purchasing One $10

question 7

Essay

James has just won the lottery after purchasing one $10 lottery ticket. The state offers him the following three payout options for after-tax prize money:
1. $50,000 per year at the end of each of the next six years
2. $300,000 (lump sum) now
3. $400,000 (lump sum) six years from now
Calculate the present value of each scenario using an 8% discount rate. Round to nearest whole dollar.
Present value of annuity of $1:
$$\begin{array} { | r | r | r | r | } \hline & { 7 \% } & 8 \% & 9 \% \\\hline 1 & 0.935 & 0.926 & 0.917 \\\hline 2 & 1.808 & 1.783 & 1.759 \\\hline 3 & 2.624 & 2.577 & 2.531 \\\hline 4 & 3.387 & 3.312 & 3.24 \\\hline 5 & 4.1 & 3.993 & 3.89 \\\hline 6 & 4.767 & 4.623 & 4.486 \\\hline\end{array}$$ Present value of $1:
$$\begin{array} { | r | r | r | r | } \hline & { 7 \% } & 8 \% & 9 \% \\\hline 1 & 0.935 & 0.926 & 0.917 \\\hline 2 & 0.873 & 0.857 & 0.842 \\\hline 3 & 0.816 & 0.794 & 0.772 \\\hline 4 & 0.763 & 0.735 & 0.708 \\\hline 5 & 0.713 & 0.681 & 0.65 \\\hline 6 & 0.666 & 0.63 & 0.596 \\\hline\end{array}$$

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Definitions:

Payables Risk Analysis

The assessment of the risks associated with failing to meet the company’s obligations on time, affecting its creditworthiness.

Receipts Assessment

This involves evaluating and analyzing the receipts of a business to determine its financial health and performance.

Restocking Costs

Expenses associated with replenishing inventory or stock levels in a business, including purchasing, shipping, and handling costs.

Carrying Costs

The aggregate amount spent on inventory upkeep, which covers costs related to storage, insurance premiums, and tax payments.