## September 28, 2011

### Why a \$1,000,000 Prize Is Often Only Worth \$725,000

McDonalds is starting up their Monopoly game soon.  Doughroller let us know  McDonald’s Monopoly Game is Back!    while Jim at Bargaineering also told us  How To Win McDonald’s Monopoly Game
The grand prize for the Monopoly game is \$1,000,000.     But there is an ( * ) asterisk by that \$1,000,000 prize.   You don't get a lump sum of 1 million dollars.  The prize is actually paid out in \$50,000 yearly for 20 years.   This is not uncommon for major prizes.  Most lotteries pay out prizes like this.

Getting paid \$50,000 a year for 20 years is not the same as having \$1,000,000 today.   First of all its common sense, everyone can see more value in having \$1M today than \$50k a year.   (Some people may prefer to get the money spread out so they don't blow it all at once, but thats a different matter.)    Inflation and the effects of interest are the main reason that money in hand is worth more than money spread out over years.   Lets look at the \$50,000 paid out on year 20.   Thats not worth \$50,000 today.  Clearly \$1 in 2031 will not buy as much as it does today due to inflation.   If you assume 3% annual inflation then \$50,000 in 2031 will be equivalent to about \$27,683 in todays dollars.   Nearly half as much.

One simple way to figure out how much equal payments over time equates to in todays dollars is to find out how much an annuity would cost.    You can buy an annuity that pays you \$50,000 a year for 20 years.   This kind of annuity can be bought with guarantee that each year will be paid regardless of how long you live so its not like other immediate annuities that depend on your lifespan.   The cost of that kind of 20 year fixed annuity is a good approximation for the value of that kind of payout.

You can get quotes on annuities at immediateannuity.com

From there we can see that a Guaranteed Income for a 20-Year Period Certain Only ("20PC")
paying \$50k a year (4167/mo) would cost  = \$724,696.

The \$1,000,000 prize from McDonalds Monopoly game is equivalent to a 20 year period certain annuity paying \$50,000 a year which would cost \$724,696.   Therefore the McDonalds Monopoly grand prize of \$1,000,000 really has a cash equivalent value of \$724,696.

But its still a fun game.