You just won the lottery...?

Question:

You just won the lottery! You have a choice now of $5,000,000 now (cash value), or $425,000 a year for 30 years. You are a pretty aggressive investor and feel confident that you can get a 9% yearly return on your investments in the stock market. From a purely financial standpoint, which do you choose?

Please show your calculations. Thanks.

Answer:
at 4% after 30 years the lump sum wins over the steady payments

yr..payments..lump sum
30...12,750,000...15,593,257

at 9% after 30 years the lump sum really wins
30...12,750,000...60,860,910

taxes will be taken out, but taxes will be taken out of the payments too.
the lump sum will be taxed once and the payments will be taxed each year. either way they both fall into the 35% bracket so as far as taxes go it doesn't matter. And you can buy tax free investments to get tax free income.

Here's how to do it. In excel, do the following

_____A_______B________C______D
1| …..1…….425000…….5000000…1.04
2| =1+A1…=A2*$B$1…=C1*$D$1

Then replicate row2 all the way to row 30

What this will show you is the following
Column A is the years from 1 to 30
column B is the $425,000 payments added together each year for 30years. At the end of 30 years it totals to $12,750,000
column C shows $5,000,000 and each row shows that number incremented by 4%

by changing 1.04 to 1.09 the process will show you the numbers under 9% so you can play with all the numbers.

Of course, this only shows intrest compounded yearly. You will do better because your compounding will be more often.

If I had 5 million dollars, I would never take a 9% risk. At 6% (a little better then a CD) you could live on $150,000/year increment for inflation each year for ever. Of course, you would need to diversify a bit better then a CD, and maybe go for 7%. But it is not worth taking any more risk than that. Besides, for a smaller intrest rate, you can get tax free income

5 million now. 9% is 450,000 a year. That's already more than a single check the other way.

5,000,000 cash- Because my first investments would be in Real Estate and not Stocks. I would use the leverage to broker multi-unit apartments, flip them to condos and sale them to the current tenants. They win and I win. Their "home" payment goes from 700 to 766 per month, but they now have equity and own it.I win, to the tune of 200,000 for one 600,000 7 unit apartment. That takes 90 days by the way. No thanks for the 9%.

A bird in the hand is worth two in the bush

Cash value. Theres no guarantee you gonna be here in 30 years.

Yeah, I'm gonna have to go with everybody else on this one, and say cash up front.

Taxes will take almost half of the 5 million lump sum so I will take the monthly payout. Then I will go to an investment company and try to get a structured settlement that will be tax wise and still give me most of the money maybe over a 5 year period.

5 milion NOW, TODAY! Then I'd go buy me a ferrari. Then I'd go open up a club. Then I'm set. FK the BS stockmarket. Properties are a better alternative.

Not only is $450,000 per year (9% return on $5 million) better than $425,000 per year, but with that option you'd still have the $5,000,000 capital at the end versus zero with the second option.

Sounds like somebody was wanting help with her homework. ;-)

You just won the lottery...?

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