AC 302 CHAPTER 6 PROBLEM QUESTION 4

AC 302 CHAPTER 6 PROBLEM QUESTION 4
Name			Date	
Instructor			Course	
Intermediate Accounting 14th Edition by Kieso Weygandt and Warfield						
Primer on Using Excel in Accounting by Rex A Schildhouse						
						
P6-4 (Evaluating Payment Alternatives) Howie Long has just learned he has won a						$500,000 
prize in the lottery. The lottery has given him two options for receiving payments: (1) If Howie takes all 						
the money today, the state and the federal governments will deduct taxes at a rate of						46%
immediately. (2) Alternatively, the lottery offers Howie a payout of					20 	equal payments
of	$36,000 	with the first payment occurring when Howie turns in the winning ticket. 				
Howie will be taxed on each of these payments at a rate of					25%	
						
Instructions:						
Assuming Howie can earn an		8%	rate of return (compounded annually) on any money invested			
during this period, which pay-out option should he choose?						
						
Step 1: Determine of single payment cash yield:						Formula
						
Step 2: Determine the present value of an annuity.						
	Cash payment is:			Amount		
	Tax burden is:			Percentage		
	Annual cash yield is:			Formula		
						
Text Title						Formula
						
Enter text answer here.						
						
						
						
						
Note: Due to significant digits of formulas, calculators, and tables, minor value differences may occur.