Every year thousands of lottery winners convert their future lottery payments into present money. The value of your future lottery payments will considerably depreciate over the traditional payoff schedule of 20-25 years. Often, recipients of lottery payments receive less than the amount offered by state lotteries. The calculation of present value of lottery payments is done by many personal representative guidance services.
The concept of present value is important in the field of corporate finance, banking, and insurance. Present value is the value today of an amount of money in to be received in future. Mathematically, it is equal to the sum of payments at a given a particular interest rate. It is essential to know the present value of lottery payments for selling or buying them.
There are certain court rules on how to determine the worth of future lottery payments. The value of future lottery payment is calculated under section 7520 tables. Several tax courts have emphasized the need for valuation of future lottery payments using annuity tables.
The following example will illustrate what actually a present value of lottery payment is. A state government in the U.S. advertises that one of its lottery prizes is $1 million (the face value.) But that advertised amount is not the actual value of the prize. In its place, the government offers to pay $50,000 a year for twenty years, on a discount rate of 10%. After receiving the first payment, if you did calculations for each of the other 20 years of payments, you would see that the present value of your entire 20-year stream of lottery payments is only about $468,246. Present value of lottery payments are based on the idea of compound interest in reverse.