O'Reilly Is a Masterful Lottery Player

question 58

Essay

O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. If O'Reilly wins the jackpot, he has a choice of receiving $200 million in 5 years or a smaller lump sum currently. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why?
a. O'Reilly's after tax return is 10%. If he chooses the current lump sum option, the lottery will pay him $130 million.
b. O'Reilly's after-tax return is 10%. His current tax rate will be 35% if he receives the lottery payment now. His expected tax rate in five years will be 40%. If he chooses the current lump sum option, the lottery will pay him $100 million.

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Definitions:

Alarm Reaction

The initial stage of the stress response, in which the body recognizes a stressor and starts to respond.

Stress Reaction

A physiological and psychological response to a perceived threat or challenge, activating the body's stress-response system.

Myocardial Infarction

A medical condition also known as a heart attack, caused by the interruption of blood flow to part of the heart.

Spaghetti

A type of pasta characterized by its long, thin, cylindrical shape, commonly served with various types of sauces.