Arvidas recently won the Central States Lottery of $3,500,000. The lottery pays either a total of twenty $175,000 payments per year with the first payment today (i.e., an annuity due), or $2,000,000 today. At what interest rate would Arvidas be financially indifferent between these two payout choices?
8.00% |
||
6.88% |
||
6.04% |
||
6.36% |
Ans 6.88%
Annuity PV Due (Beginning)= | P + P [ 1 - ( 1 + r )^{-(n-1)} ] |
r | |
2000000 = | 175000 + 175000 * ( 1 - ((1 / (1 + r%)^(20-1))))/ (r%) |
(2000000 - 175000 ) / 175000 = | ( 1 - ((1 / (1 + r%)^(20-1))))/ (r%) |
10.4285714285714 = | ( 1 - ((1 / (1 + r%)^(20-1))))/ (r%) |
r = | 6.88% |
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