Lottery Winnings: State sponsored lotteries are an extremelypopular and highly successful method by which state governmentsraise the much needed funds for financing public expenses,especially education. Needless to say, they are also a verycolorful part of everybody’s hopes of striking it rich. Statesoften team up so that the member lotteries can offer higherjackpots to participants. Mega Millions is one of these games,where 44 lotteries team up to offer prizes of at least $12 million.Jackpots are rolled over and grow until someone wins. Mega Millionspaid the record jackpot of US lotteries in March 2012, with ajackpot of $656 million, to three winning tickets from Kansas,Illinois and Maryland. The lottery carries two payment options tothe winner. Winners can either opt to take 26 equal annualinstallments, or take the cash payout option at their share of $474million. There is a 25% federal tax on lottery winnings and a 5%state tax for Kansas and Illinois and 8.75% state tax for Marylandon lottery winnings.-How much would the after-tax annual payment befor each winner?-Each one of these winners chose the cash pay-outoption. Assuming a return of 5% a year, did they make the correctdecision?-Is the lottery correct in advertising the jackpot at $656million?-If the lottery would like to give the annuity option achance at being selected, how do you think they should structuretheir payment plans? Any ideas?