1. (Evaluating Payment Alternatives) Terry O'Malley has just learned he has won a $900,000 prize in the lottery. The lottery has given him two options for receiving the payments:
(1) If Terry takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately.
(2) Alternatively, the lottery offers Terry a payout of 20 equal payments of $62,000 with the first payment occurring when Terry turns in the winning ticket. Terry will be taxed on each of these payments at a rate of 25%.
Assuming Terry can earn an 8% rate of return (compounded annually) on any money invested during this period, which pay-out option should he choose?