4.8 Solving a Lottery Problem

Jerry Berggren is not a famous financial expert, but on April 3, 2002, the self-employed appliance repairman did make the financial news. He was the sole winner of an advertised $48 million Powerball lottery game. He had a choice of one of two payoff options: either a lump-sum payment upfront or an annuity over twenty-five years. Berggren accepted a lump-sum payoff of $26,072,769 pretax ($17,729,483 after tax) in full settlement of the $48 million advertised pot. The annuity alternative was equal annual payments of $1,920,000 pretax, or $1,305,600 after tax, over twenty-five years. Did Berggren make a sound financial decision as to how he should receive his winnings? Should he have taken the stream of annual payments ...

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