The big lottery jackpots that are advertised are not money paid all at once. Lottery winnings are typically paid out over many years, in installments. Some lotteries allow the winner an option to take a cash payout up front, but at a substantially reduced amount. If this is not offered, other independent companies will pay a lump sum if you turn over the yearly payments to them. To decide if this is the best option, you must know today's cash value of the yearly payments. Microsoft Excel or other spreadsheet software will help you calculate this value.
Determine the total amount of payments you will receive and the time frame in which you will be receiving these payments. Payout time periods vary according to the state overseeing the lottery. Florida has the longest payout period at 30 years.
Set up an Excel spreadsheet labeling individual cells for the variables involved in the calculation. Starting at the top, in column A, label the cell in row one "rate," followed by "number of years." Name the third cell "payment," and the fourth cell "value." In column B, next to the "value" label, enter the formula to calculate the present value: =pv(b1,b2,b3,1). This calculates the present value of the payments in today's money. If you are using the free open-source spreadsheet from Open Office, substitute semi-colons for commas in the formula.
Enter the appropriate values in the cells in the "B" column. Beside the "rate" label, enter the projected interest rate that you would receive for the money. Beside the "number of years" label, enter the number of years that you would receive the payment. Enter the payment amount next, as a negative number. Negative numbers in spreadsheets indicate that money has been paid to you.
View the cash value of the lottery winnings in today's money beside the "value" label. The formula will automatically compute this amount for you.
Try different numbers for interest rate, to see the difference between conservative or aggressive investments of the lottery winnings. You can use a financial calculator to figure the value as well, using the keys that correspond to the appropriate values.
When calculating the present cash value of lottery winnings, don't forget to consider the impact of income taxes on the winnings. Taking a large sum of money in one year may cause you to pay more in taxes. Also, consider the impact of inflation on the yearly payout; the lottery payments will have less buying power over time.
Items you will need
- computer running Excel or other spreadsheet software, or a financial calculator