You win your state lottery. The lottery officials offer you the following options: you can accept annual payments of $50,000 for 20 years or receive an upfront payment of $700,000. Ignoring issues like mortality tables, taxes, etc.; and assuming the first payment is made immediately, what market interest rate would make it more attractive to take the upfront payment?

Question

Business

Leila Douglas

21 May, 21:37

You win your state lottery. The lottery officials offer you the following options: you can accept annual payments of $50,000 for 20 years or receive an upfront payment of $700,000. Ignoring issues like mortality tables, taxes, etc.; and assuming the first payment is made immediately, what market interest rate would make it more attractive to take the upfront payment?

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Answers (1)

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Hudson · Answer 1

The answer is "4.121% for 20 year".

Explanation:

The $700,000 could be compared to both the current flow rate of $50 000 per year over the next 20 years. It used a financial calculator or a table, as well as the inner rate of return is 4.121 percent. When you are confident, it would be capable of earning more than 4.121 percent every year in the next 20 years, on average.