Question

Practice: Lottery Winner - Lump Sum or Annual Payments? A 26-year-old hairdresser is celebrating after what she thought was a $1,000 winning lottery ticket turned out to be worth a staggering $1.3 million.* lt was only when she traveled to the California Lottery Van Nuys District Office on December 26 that she found out she had actually won $1,000 per week for 25 years - a total of $1.3 million (She)... has reportedly arranged to meet a financial adviser to discuss whether to take out the $1.3 million in installments over 25 years, or a lump, pre-tax sum of around $750,000 If the Present value is $750,000, what annual interest rate % is needed to make the payments? Simplifying assumptions: . Payments will be made on an annual (not weekly) basis Winner receives the first payment of $52,000 now (year 0) followed by payments for the next 24 years.

Answer 1

Solution:

Calculation of Annual Payments

Annual Payments = Weekly Payment x 52 weeks = $1,000 x 52 = $52,000

Calculation of Rate of Interest to be earned on $750,000 to make 25 Annual Payments of $52,000

Following are the steps to be followed on Microsoft Excel to calculate the Rate:

Step 1: Click on "FORMULAS" tab at the top of Microsoft Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option "RATE"
Step 4: Insert PV = 750000    Nper = 25 PMT = -52000     Type = 1

RATE = 0.052858

Therefore, the annual rate of interest needed to make the payments is 5.29%