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July 3, 2015

Homework Help: Finance

Posted by Jessie on Saturday, January 19, 2013 at 6:32pm.

Suppose the chances of winning the lottery are 1 in 14 million with the earnings of $20 million to the lucky winner. A ticket costs $1. However, the winnings are paid over 20 years, with
the first $1 million payment occurring immediately. If inflation is 2% per year ,and the winnings are taxable, is the lottery a good investment? (Assume that you are in a 40% marginal income tax bracket and that the appropriate nominal
discount rate is 10% per year.)

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