The Lotto Jackpot: The Lump Sum Versus the Annuity
FINANCIAL PRACTICE AND EDUCATION, Fall/Winter 1995
Posted: 29 Apr 1998
Lotto players who win the jackpot must choose to receive their winnings as either an annuity or a lump sum. Students in an introductory finance class can determine the best alternative, applying their knowledge of present value and tax considerations to an interesting 'real world' financial decision. Using the current lottery in your state further piques the students' interest. The lump sum payment is taxed immediately, whereas the annuity payments are taxed when they are received. Analysis of a $6,000,000 jackpot shows the annuity netting the winner $686,899 more than the lump sum.
JEL Classification: A20, E62
Suggested Citation: Suggested Citation