Suppose you just won the state lottery, and you have a choice between receiving $3,500,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes. Select the correct answer. a. 4.47% b. 2.87% c. 4.07% d. 3.27% e. 3.67%

Question

Cornelius Lloyd

Business

23 December, 21:43

Suppose you just won the state lottery, and you have a choice between receiving $3,500,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes. Select the correct answer. a. 4.47% b. 2.87% c. 4.07% d. 3.27% e. 3.67%

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Dempsey · Answer 1

Answer: The correct answer is e). 3.67%

Explanation: An ordinary annuity is a series of payments made at the end of each period.

The formula for ordinary annuity is PV = PMT * ((1 - (1 + r) ^ - n) / r)

Where; PMT = the periodic cash payment; r = the interest rate per period; n = the total number of periods and PV = present value.

Therefore; 3500000 = 250000 * ((1 - (1+r) ^-20) / r

This will give the rate as 3.67%