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17 April, 17:59

You just won the NEU lottery. You have the choice of $12,000,000 today or a 20-year annuity of $800,000, with the first payment coming one year from today. What rate of return is built into the annuity?

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  1. 17 April, 21:47
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    2.91%

    Explanation:

    PMT = 800,000 (Annual amount that you receive)

    n = 20 years

    PV = - 12,000,000 (the amount you should have if you receive a lump-sum today)

    FV = 0 (not given)

    i/r = ? (The rate of return we need to find)

    Using financial calculator, we have the rate of return built into the annuity is:

    i/r = 2.91%
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