Powerball winner

[f3lix]

A Powerball ticket worth $340 million was sold in the Gold Rush town of Jacksonville, state lottery officials said Thursday. The lump sum option would be worth $110 million after taxes.

That's less than 1/3rd... fucking government...

It's not the government per se, it's the fact that the value they quote is all the payments of the annuity added together. When you win the lottery, the default option for them is to quote how much money they are going to give you over 20 years - not adjusted for inflation or allowing for any interest.

The present value of a 20 year annuity is much much less than the value of all the payments added together. This is why mortgages end up making payments several times over the ammount borrowed.

So if you choose to take the present value of the annuity (in a lump sum) the amount you get is significantly less. And from this amount - you pay taxes (about a third or so).

So it's not so much "fuck the government," it's fuck lottery (which i guess is probably government - run) for misleading you into thinking you are going to win a large amount of money instead of fucking you over for 20 years.

[ October 20, 2005, 04:57 PM: Message edited by: DJ FC ]

[Ironic Mustache]

I'd pretty much take $110,000,000 without too many complaints.

But it's still shitty that they quote a value of money spread out over 20 years - with the purpose of missleading people to "invest" more in lottery tickets than they should.

[Ironic Mustache]

True enough.

[ur my bitch]

not true. They are willing to pay the full amount quoted, just over time. Everybody knows that, so it is not a trick.

They trick is at what rate are they adjusting the time value of money? Are they using inflation? prime? Libor? Fed Funds? The key to see if you are getting fucked is the discont rate. Compare it to the actual rate of inflation and if the discount rate is higher, than you are fucked.

[Repugnant Abomination]

What's crazy is Jacksonville is about 20 miles from where I live.

[Ironic Mustache]

So close, yet so far away.

[f3lix]

Originally posted by Ironic Mustache:
I'd pretty much take $110,000,000 without too many complaints.

I hate this mentality. They advertise it as a $340 million jackpot, and you're just going to be happy pissing away that additional $200 million?

Secondly, the gov't taking 1/3rd for taxes is just wrong and stupid. The lottery is a welfare system for the poor to get poorer and the gov't knows they will pray on those fools who dive into it weekly.

Originally posted by ur my bitch:
not true. They are willing to pay the full amount quoted, just over time. Everybody knows that, so it is not a trick.

They trick is at what rate are they adjusting the time value of money? Are they using inflation? prime? Libor? Fed Funds? The key to see if you are getting fucked is the discont rate. Compare it to the actual rate of inflation and if the discount rate is higher, than you are fucked.

The problem is they use no adjustment - so it is a trick. And both you and I know that poor people playing the lottery don't fully understand "discount rates." If you "Win 20 million" they pay you 1 million dollars per year for 20 years. Well my handy dandy little calculator tells me that at 7 percent (a reasonable rate) that annuity is only worth $10.59M hardly the $20M that the lottery players are expecting.

[ur my bitch]

at 7% I got a PV of $15,762,394.30

However, 7% is a bit high now considering the real rate of inflation and where short term rates are. I would bet they are using a 3% or 4% rate, but the Government isn't about to give too much $ away to a winner, they'd rather misappropriate it.
Adn, if a poor person wins it, fuck it, that poor bastard is seeing more money in a year than they would in a life time.

First of all 1M PMT, 7%, 20N = PV of 10.59

The Fed Funds Rate alone is 3.75%
180 Day T Bills are at 4.155%

These are risk-free rates. The discount rate should be higher.

Edit:
Nevertheless, the amount the lottery quotes is the sum of all the payments and not the PV of those payments - thus encouraging the public to gamble more than they normally would.

[ October 20, 2005, 07:50 PM: Message edited by: DJ FC ]

[ur my bitch]

I need to check my calculations...I haven't been using my financial calculator in a while....stupid considering I am supposed to be taking my CFA in 6 weeks.

I am sure they are using risk free rates because the governemnet wouldn't calculate investment risk into lottery winnings. They would assume the person can return x based on the Treasury....and seeing how the yield curve is very flat, I wouldn't doubt that they are using no more than 4% for the DR.

And shit, $110MM???? the winner can invest that, live wealthy off of the interest and never touch the principle. Generations can be set for life.

They couldn't use the risk free rate because the investment is too long-term... there is always inflation risk. The rate they use must be higher.

But yes, looking at some rates, 7% might be too high: 30 year T-Bonds are at 5.375% But you also have to consider that the winner could re-invest in a risky security (mutual funds) which would have expected returns much higher.

And the government would have every incentive to push up this DR - the greater the rate, the less the lump sum payment they have to make.

Edit: they used 8.237%

340M over 20 years = 17M PMT
164.4 was the lump sum = PV
20 =N
8.237% = i

Much, much higher than the risk-free rate. Once again proving that the lottery is gay.

[ October 20, 2005, 08:07 PM: Message edited by: DJ FC ]

[ur my bitch]

That's a hefty DR.

BTW, the 30 yr is at a 4.662%

[jbonham]

they do base their rates on the market rate for bonds.

http://www.powerball.com/pb_contact.asp