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Financial Management Question 1 - Essay Example

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The annuity option will be subjected to taxation which includes the federal and state tax each year you receive your price whereas the cash option is subjected to tax only in the year you receive the amount.
The money you win will not gain value in future if you choose the annuity option, whereas if you choose the cash option you can invest now or deposit the money in a bank where the money can earn interest rate.
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Financial Management Question 1
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Download file to see previous pages Taxes by the federal and state have to be paid as required by the law; therefore the lottery has to name the price as 363 million because that's the amount to be won before taxation. The lottery also brings many benefits to the community and the state as a whole such as funding education and therefore people need not to be negative about the price to be won.
If the only option available was the annuity payment then Larry could maximize the value of his winning by acquiring a loan from a bank that will be paid within the time limit, Larry would get money that will enable her to invest and an amount that will be payable at an amount of 4,732,962 dollars per year. The interest rate should be the guiding factor in determining the amount to acquire as loan.
Winners select the cash option because they are rational and want to maximize the value of their money today, they will opt to have their cash today than for 26 years due to uncertainties about the future, and they also do not want to pay taxes each year for 26 years because this will just reduce the total amount they receive.
The winner will want his pay in cash due to the fact that ...
options the annuity and the cash option; in any of the options given the amount does not add up to the same amount and therefore the price should not be termed as 363 million.

However the lottery in order to attract more people to participate in the lottery they are justified to name the total amount to be won, they should also disclose all the information about the game to the people. Taxes by the federal and state have to be paid as required by the law; therefore the lottery has to name the price as 363 million because that's the amount to be won before taxation. The lottery also brings many benefits to the community and the state as a whole such as funding education and therefore people need not to be negative about the price to be won.

4. if the only option available was an annuity payment plan, what could Larry do to maximize the value of his winning assuming that the risk free rate of interest is 5%
If the only option available was the annuity payment then Larry could maximize the value of his winning by acquiring a loan from a bank that will be paid within the time limit, Larry would get money that will enable her to invest and an amount that will be payable at an amount of 4,732,962 dollars per year. The interest rate should be the guiding factor in determining the amount to acquire as loan.

5. Why do most winners select the cash option plan when given the choice
Winners select the cash option because they are rational and want to maximize the value of their money today, they will opt to have their cash today than for 26 years due to uncertainties about the future, and they also do not want to pay taxes each year for 26 years because this will just reduce the total amount they receive.
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