The Lotto Case (Hitting the Jackpot)

Questions: 1. Is there necessarily one best decision for the group regarding the payout options? If so what is it and why?
Amount Of Jackpot	$6,000,000
Option 1
A total $6,000,000 is paid over a period of 20 years through 20 equal installments.
Option 2
Lump-sum Jackpot Amount
Option 1 Annuity
Future Value (final balance)	$6,000,000
Rate	3.00%
Nper	20
present value of Payment each year	$216,790.53
Present Value of Total Amount paid at end of 20 years = $216,790.53 x 20 years	$4,335,810.59
The group can choose the lump-sum option because its paying out more as compared to Annuity option in terms of time value of money concept.

THE LOTTO CASE (Hitting the Jackpot)

Questions:

1. Is there necessarily one best decision for the group regarding the payout options? If so, what is it and why?

The group can choose the lump-sum option because it is fair enough. They can get the advertised jackpot value if they wisely invest their proceeds. However the state lottery can invest the entire present cash value of the jackpot while the group will only be able to invest the after-tax amount. Therefore, to match the state lottery payment instalments, the group would have to earn a significantly higher investment return on their lump sum than the state would need to get.

2. What might be the reason(s) that Chad does not want to pay off his debt? Do you concur?

Chad’s decision why he does not want to pay off his mortgage is quite valid. His mortgage does not affect his home’s value. He thinks that his home will rise in value over time. His house value in the future will not be affected by his mortgage. In fact, he is going to build equity anyway.

Maybe Chad knows that the mortgage interest is tax-favorable. The mortgage is deductible at his top bracket, but the investments are taxed as low as 15%. Therefore, tax law makes it beneficial for him to maintain his mortgage.

3. Prepare a personal analysis of the pay out options for Bob, Chad and Dylan. Designate the preferred option for each individual and explain why.

For Bob, Chad and Dylan, though they all have different concerns and financial backgrounds, I would say that the three of them should take the Lump Sum option.

It is a smarter investment for them to take the lump sum option. The three of them will pay the income tax from their winning money. Putting that into a super conservative portfolio—without touching the principal amount—that returns around 3 percent would generate in a year. If they are going to die soon, their inheritors will still have the principal to play with.

Furthermore, they will have more control of their money. They can always make up for the difference by taking the lump sum and investing. So, there is no reason for them to wait for a yearly allowance from the lottery commission—which could go out of business theoretically—to spend or donate their money.

4. What non-financial factors might enter into the decision for the winners?

Other factors that impact the decision for the winners are whether they purchased their ticket on their individual selves or for the group, whether they are married, and whether they should do any estate planning before claiming the prize.

People have created general partnerships, limited partnerships, corporations, limited liability companies, revocable trusts, and irrevocable trusts as the winner of a lottery prize. Whatever entity is created, it should be something that is justified under the facts and makes sense for the group. The three are unused to complexity as most lottery winners are. So, in this case, the group should not over-plan their situation and contribute to post-winning stress.