8 AM Class Group 2
Group 2 Project Part 1 (see hard copy) Year Payment Fed Tax Ct tax Total Plus Interest Earned Tax on Interst Total Interest Total for Year Received 25% 5% Previous Years Total Earned 0 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 1 $50,000.00 $12,500.00- $2,500.00- $35,000.00 $2,100.00 $630.00 $1,470.00 $36,470.00 2 $50,000.00 $12,500.00- $2,500.00- $71,470.00 $4,288.20 $1,286.46 $3,001.74 $74,471.74 3 $50,000.00 $12,500.00- $2,500.00- $109,471.74 $6,568.30 $1,970.49 $4,597.81 $114,069.55 4 $50,000.00 $12,500.00- $2,500.00- $149,069.55 $8,944.17 $2,683.25 $6,260.92 $155,330.47 5 $50,000.00 $12,500.00- $2,500.00- $190,330.47 $11,419.83 $3,425.95 $7,993.88 $198,324.35 6 $50,000.00 $12,500.00- $2,500.00- $233,324.35 $13,999.46 $4,199.84 $9,799.62 $243,123.98 7 $50,000.00 $12,500.00- $2,500.00- $278,123.98 $16,687.44 $5,006.23 $11,681.21 $289,805.18 8 $50,000.00 $12,500.00- $2,500.00- $324,805.18 $19,488.31 $5,846.49 $13,641.82 $338,447.00 9 $50,000.00 $12,500.00- $2,500.00- $373,447.00 $22,406.82 $6,722.05 $15,684.77 $389,131.78 10 $50,000.00 $12,500.00- $2,500.00- $424,131.78 $25,447.91 $7,634.37 $17,813.53 $441,945.31 11 $50,000.00 $12,500.00- $2,500.00- $476,945.31 $28,616.72 $8,585.02 $20,031.70 $496,977.01 12 $50,000.00 $12,500.00- $2,500.00- $531,977.01 $31,918.62 $9,575.59 $22,343.03 $554,320.05 13 $50,000.00 $12,500.00- $2,500.00- $589,320.05 $35,359.20 $10,607.76 $24,751.44 $614,071.49 14 $50,000.00 $12,500.00- $2,500.00- $649,071.49 $38,944.29 $11,683.29 $27,261.00 $676,332.49 15 $50,000.00 $12,500.00- $2,500.00- $711,332.49 $42,679.95 $12,803.98 $29,875.96 $741,208.46 16 $50,000.00 $12,500.00- $2,500.00- $776,208.46 $46,572.51 $13,971.75 $32,600.76 $808,809.21 17 $50,000.00 $12,500.00- $2,500.00- $843,809.21 $50,628.55 $15,188.57 $35,439.99 $879,249.20 18 $50,000.00 $12,500.00- $2,500.00- $914,249.20 $54,854.95 $16,456.49 $38,398.47 $952,647.67 19 $50,000.00 $12,500.00- $2,500.00- $987,647.67 $59,258.86 $17,777.66 $41,481.20 $1,029,128.87 20 $50,000.00 $12,500.00- $2,500.00- $1,064,128.87 $63,847.73 $19,154.32 $44,693.41 $1,108,822.28 Part 2 (see hard copy) Year Paid Fed Tax(25%) CT Tax(5%) Total After Tax Invest (6%) Tax on Interest Total Tax Earned Total 1 $1,000,000.00 $250,000.00 $50,000.00 $700,000.00 $42,000.00 $12,600.00 $29,400.00 $729,400.00 2 $0.00 $0.00 $0.00 - $43,764.00 $13,129.20 $30,634.80 $760,034.80 3 $0.00 $0.00 $0.00 - $45,602.09 $13,680.63 $31,921.46 $791,956.26 4 $0.00 $0.00 $0.00 - $47,517.38 $14,255.21 $33,262.16 $825,218.42 5 $0.00 $0.00 $0.00 - $49,513.11 $14,853.93 $34,659.17 $859,877.60 6 $0.00 $0.00 $0.00 - $51,592.66 $15,477.80 $36,114.86 $895,992.46 7 $0.00 $0.00 $0.00 - $53,759.55 $16,127.86 $37,631.68 $933,624.14 8 $0.00 $0.00 $0.00 - $56,017.45 $16,805.23 $39,212.21 $972,836.35 9 $0.00 $0.00 $0.00 - $58,370.18 $17,511.05 $40,859.13 $1,013,695.48 10 $0.00 $0.00 $0.00 - $60,821.73 $18,246.52 $42,575.21 $1,056,270.69 11 $0.00 $0.00 $0.00 - $63,376.24 $19,012.87 $44,363.37 $1,100,634.06 12 $0.00 $0.00 $0.00 - $66,038.04 $19,811.41 $46,226.63 $1,146,860.69 13 $0.00 $0.00 $0.00 - $68,811.64 $20,643.49 $48,168.15 $1,195,028.84 14 $0.00 $0.00 $0.00 - $71,701.73 $21,510.52 $50,191.21 $1,245,220.05 15 $0.00 $0.00 $0.00 - $74,713.20 $22,413.96 $52,299.24 $1,297,519.29 16 $0.00 $0.00 $0.00 - $77,851.16 $23,355.35 $54,495.81 $1,352,015.10 17 $0.00 $0.00 $0.00 - $81,120.91 $24,336.27 $56,784.63 $1,408,799.74 18 $0.00 $0.00 $0.00 - $84,527.98 $25,358.40 $59,169.59 $1,467,969.33 19 $0.00 $0.00 $0.00 - $88,078.16 $26,423.45 $61,654.71 $1,529,624.04 20 $0.00 $0.00 $0.00 - $91,777.44 $27,533.23 $64,244.21 $1,593,868.25 Part 3 (see hard copy) ((1,000,000)/anspart2)=(x/(anspart1)) x= $695,680.01 Part 4 When winning the lottery there are two ways to receive your winnings, either by a lump sum payment or an annuity. Each of them has their own pros and their own cons. A lump sum payment is paid all at once shortly after you have won, as compared to the annuity with is usually paid out over a twenty year period. Some prefer the annuity so they don‚t spend all of their money once they get it, which has happened to many lottery winners. Others prefer the lump sum because of the immediate riches and wealth. There are quite a few pros and cons of a lump sum payment. The first pro is that you have your money right away and do not have to wait twenty years as compared to getting paid annually. However, the sudden wealth and responsibility of managing the money can be too much for some people to handle, resulting in increased spending and money disappearing quickly. The annuity offers an ease into the new found wealth which provides for easier money management, but less ways to invest your money. The amount of the investment with a lump sum is much greater than the annuity. With getting paid in the form of a lump sum you are able to invest forty-two thousand dollars immediately and will have made more money on interest in twelve years than you can earn in twenty with the annuity. Also your total earnings on the interest alone are nearly thirty thousand dollars more than if you had received the annuity, which is a big pro for the lump sum. But, you will have less money taxed on interest and more money total before your investment with the annuity, which can be more money in your pocket and not in the governments. Another pro and con for each is the amount of money received after the twenty years is over. It is a con for the annuity and a pro for the lump sum. With the lump sum, you will receive nearly 1.6 million dollars as compared to just over 1.1 million with the annuity. With the half of a million dollars difference, it‚s a choice of patience and safety which the annuity offers or immediate wealth and the risk of larger investments with the lump sum. Each has their own financial pros and cons. They also each have responsibilities that come along with them and some which can be managed easier than others. Yes, the amount of money received is greater in a lump sum than annuity, but so is the risk. The annuity is less money and much less organization in dealing with investments. Part 5 The assumptions made to simplify this assignment were made rather quickly. Our group decided there had to be a formula to find the answer for part three of the project. The members in our group found that the formula is 1,000,000/1,593,868.25 (answer for part b) times x/ 1,108,822.28 (answer for part a), with X being 695,680.01 and the answer to part three. Our other assumptions on the project did not help to make it easier, just on how to do it correctly and on time. As for the important factors that were omitted, we feel that we did not leave anything out. We had a precise plan on how to do the project efficiently. The group covered all areas of importance leaving none behind and the project was completed with the best of our knowledge. Team Report There are numerous games in the Connecticut lottery, each of which would be considered a scam if run by a private business. They all do pay out prize money, but the vast majority of bettors wind up losing. Winners of large prizes are given the option of being paid their winnings as a lump sum or in the form of an annuity. The lump sum is considerably less than the advertised winnings; the annuity consists of payments made annually until the advertised amount won is distributed. In this assignment part one asks what the total amount you would receive is if you were to get one million dollars disbursed in payments of $50,000 over a period of twenty years. We calculated you would receive $1,108,822.28. We arrived at this answer because you‚d take your payment and take out the amount taxed per year (30%) add on the interest earned (6%) but with the taxes taken out of the interest as well for each year. Also after the first year, you‚d earn interest on your payment plus the amount from the previous year and then take out taxes and add that on for your total. (see spreadsheet for part one) Part two asks what the total amount received would be if you were to get the one million dollars in a lump sum, rather than payments of $50,000 , over a period of twenty years. We calculated you would receive $1,593,868.25. We arrived at this answer because you‚d take out the 30% total tax on the amount received, and then add on interest every year that passes, remembering to take out the tax on the interest before totaling it. (See spreadsheet for part two) Part three asks what the amount would have to be in order for the winner to end up with the same amount as the lump sum of the annuity after twenty years (after taking out taxes and earning the taxed interest per year). We calculated you would receive $695,680.01. We came to this answer by taking one million and multiplying it by $ (the answer for part one) and then taking that whole amount and dividing it by $ (the answer for part 2) to get our answer. The actual formula for this is: (1,000,000/answer part two) x (x/answer part one) = {(1,000,000 * answer part one)/answer part two} = x Part four asks to analyze the pros and cons of both lump sums of annuities, and receiving payments over a certain amount of time and comparing them. We believe some of the pros of getting a lump sum is that you get all the money at once, where as you can earn more interest, in a shorter amount of time. Also if there is a need for a large quantity of money to pay something, if something happens, like an accident, you have the funds available. Some of the cons though, are if you do use the money right away, you don‚t have it to earn interest every year. Some pros for the payments over a period of time are you can‚t spend your total amount all at once, and you continuously get a payment every year, like an extra paycheck, that‚s just rather large. Some of the cons are you earn a smaller amount of interest because the amount in the bank is smaller, so you get less money overall in the end, and if you needed to pay a large amount of money (bigger than your payment each year) right away, because of an accident or something, you don‚t have the funds available.