Lottery Cash Option factors

Can anyone clarify this for me? I routinely play both the Powerball and Mega Millions lotteries, for a couple of bucks each drawing. I've noticed that the cash option factor for the two are completely different. For example, as of this morning, Powerball shows a $190 Million jackpot (annuity) with a $99 Million lump sum cash payment, so the cash option factor is 0.521. Mega Millions shows a $64 Million jackpot (annuity) with a $41.8 Million lump sum cash payment, so the cash option factor is 0.653.

Can anyone explain why there would be such a large discrepancy between these two? I'd expect to see somewhat different numbers based on different assumptions the actuaries in charge are using, but a 13.2% difference seems unreasonable to me.

If both were at $100 million (annuity), how can Powerball explain paying out $13 million less in a cash option payment than Mega Millions?

Lotteries pay an annuity based on the amount of cash available. So to compare them you have to look at the size of the cash prize and not the annuity prize. Powerball's annuity pays over 29 years and mega millions over, I think, 25 years, therefore for equal cash available and equal interest rates, powerball's annuity will be higher than mega millions. Therefore Powerball's "cash option factor" will be lower.

Check this link to one of their FAQs. I think it answers your question.

http://www.megamillions.com/faqs/#16

The basic issue with the difference in payout is something called "present value". If you choose the cash lumpsum option, you get the present value of the jackpot as if it were paid out over 25 or so years. So think of it this way. A dollar today is worth more than 50 cents at the end of the year plus 50 cents at the end of next year. Lottery's purchase annuities with the revenue they collect and they pay out the distributions accordingly when the jackpot is hit. Rule of thumb is that you take about 40% off of the jackpot to get the present value. And then you should factor in taxes after that which depending on your state and max federal will eat another 50% of what's left over. Your take home at the end is about a little over 30% of the main jackpot on an after tax basis.

Quote: Asswhoopermcdaddy

... Rule of thumb is that you take about 40% off of the jackpot to get the present value. ...

The specific question in this thread, I believe, asked why is this percentage noticeably different between Powerball and MegaMillions. The first response post gave most of the answer, and the FAQ that I linked to gives the detailed differences.