You win the lottery! The winnings of the lottery is $50 million but you are...
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You win the lottery! The winnings of the lottery is $50 million but you are given two payout options: (1) you can cash out at $39 million today; or (2) you can take 25 annual payments of $2 million per year starting now. a) If your current bank interest rate is 3% p.a. compounded daily, which option would you choose? [3 marks] b) Suppose the state you live in now charges a lottery tax rate. If you cash out immediately (option 1), you have to pay a lottery tax of 10% of your total earnings and no taxes if you take the 25 annual payments (option 2). How much would you now take home if you cash out immediately (option 1)? Does your decision change? Explain. [3 marks]
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