Assignment Details: Who Wants To Be A Millionaire? You Just

Assignment Detailswho Wants To Be A Millionaire1 You Just Won 1 Mi

Who Wants to Be a Millionaire? 1. You just won $1 million dollars in the lottery! They offer you two options for your winnings: a lump sum payment right now, or $100,000 a year over the next 10 years. Current 10-year interest rates are at 5%, and the current tax on lottery winnings is 40%. · What is the amount you will receive today with the lump sum option? · Which option would you select? How would you present your argument for your decision in a debate? 2. Sorry, you didn’t win the lottery, but here’s a way you can still be a millionaire! Starting at age 22, every night you take $5 out of your pocket and put it in a manila envelope (title it “Lottery Winnings”). At the end of the year, you place the money from the envelope in a stock fund with an average interest rate of 10%. · How much will you have in the account when you retire at age 65? · What would be different if you started this plan later in your life? Deliverable Length: Submit a double-spaced Word document of 1–2 pages that contains your answers to the four questions listed in the assignment description, any calculations you performed, and all formulas that were used. Also, in the Word document, insert an Excel spreadsheet that shows how you arrived at your answers, or screenshot of the online calculator utilized with your answers shown.

Paper For Above instruction

The scenario presents two main financial decisions: choosing between a lump-sum lottery payout and an annuity structured payout, and a long-term savings plan that involves daily savings and investment growth. This comprehensive analysis will explore each option's financial implications, calculations, and strategic considerations, supported by relevant financial principles and formulas.

Part 1: Assessing the Lottery Winnings Options

The first decision involves selecting between receiving a lump sum payment immediately or an annuity of $100,000 annually over ten years. Given current interest rates and tax implications, determining the present value of the annuity and comparing it to the lump sum becomes crucial.

Calculating the Lump Sum Payment

Assuming the total winnings are gross, the actual amount received after tax must be calculated. With a 40% tax on lottery winnings, the net amount is:

Net amount = Gross winnings × (1 - Tax rate) = $1,000,000 × (1 - 0.40) = $600,000

The lump sum offered should consider the present value of the future payments discounted at the current interest rate of 5%. However, since the lump sum is usually offered as a discounted value, we need to check whether the immediate payout, after taxes, provides better value or not.

Present Value of the Annuity

The present value (PV) of an annuity paying $100,000 annually for 10 years at 5% interest can be calculated using the formula:

PV = P × [(1 - (1 + r)^-n) / r]

Where:

- P = annual payment = $100,000

- r = annual interest rate = 0.05

- n = number of years = 10

Calculating:

PV = $100,000 × [(1 - (1 + 0.05)^-10) / 0.05] ≈ $100,000 × 7.7217 ≈ $772,170

Since the after-tax amount of the lump sum is $600,000, it is lower than the present value of the annuity. Therefore, in a purely financial sense, the annuity might be more valuable.

Decision and Argument Presentation

Choosing between the two options depends on personal preferences for immediate cash versus steady income, risk considerations, and tax implications. For a debate, I would argue that although the lump sum offers immediate access to funds, the annuity provides a guaranteed income stream that is financially more advantageous over time, especially considering the present value calculation. The tax on lump sum winnings reduces the immediate benefit, but it could be invested further for additional growth.

Part 2: Saving Strategy to Achieve Millionaire Status

The second scenario involves sustaining a daily savings habit starting at age 22, with the aim of accumulating significant wealth by retirement at age 65 through investment growth in a stock fund with an average annual interest rate of 10%.

Calculating Total Savings at Retirement

Every night, $5 is saved, totaling $35 weekly, assuming a 7-day week. The annual savings thus are:

Annual savings = $5 × 365 ≈ $1,825

The accumulated amount considers the compound interest earned on each year's deposits. This is a future value of an ordinary annuity with annual contributions, given by:

FV = P × [( (1 + r)^n - 1) / r]

Where:

- P = annual contribution ($1,825)

- r = 0.10

- n = number of years = 43 (from age 22 to 65)

Calculating:

FV = $1,825 × [(1.10)^43 - 1] / 0.10 ≈ $1,825 × (72.89 - 1) / 0.10 ≈ $1,825 × 718.9 ≈ $1,312, 377

Thus, by age 65, you could expect to have approximately $1.31 million, assuming consistent contributions and annual returns.

Impact of Starting Later

If the plan begins at a later age, say 35, with fewer years to retirement (30 years instead of 43), the future value diminishes because of reduced compounding time. Recalculation shows that the amount would significantly decrease, illustrating the importance of early savings for wealth accumulation.

Conclusion

Financial decisions surrounding lottery winnings and long-term savings require careful analysis of present value, interest rates, tax implications, and timing. Choosing the annuity over the lump sum in the lottery scenario appears advantageous based on present value calculations, especially after taxes. Meanwhile, starting a disciplined savings plan early provides substantial benefits due to compound interest, emphasizing the value of early financial planning. Both strategies underscore the importance of understanding financial principles to maximize wealth accumulation and decision-making effectiveness.

References

• Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset. John Wiley & Sons.
• Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage Learning.
• Graham, B., & Dodd, D. (2008). Security analysis: Sixth edition. McGraw-Hill Education.
• Khan, M. Y. (2018). Financial management: Principles and applications. McGraw-Hill Education.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance. McGraw-Hill Education.
• Investopedia. (2023). Present Value (PV). https://www.investopedia.com/terms/p/presentvalue.asp
• Morningstar. (2023). Stock Fund Returns. https://www.morningstar.com
• Statista. (2023). Interest rates and financial statistics. https://www.statista.com
• U.S. Securities and Exchange Commission. (2023). Compound interest and savings. https://www.sec.gov
• Federal Reserve Bank. (2023). Current interest rates. https://fred.stlouisfed.org