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30 September, 19:57

In a recent large PowerBall lottery, the prize was reported to be worth $590 million, which could be taken in 25 equal annual installments of $23.6 million beginning today or as a single payment today of $334 million. a) What interest rate is the lottery commission using?

b) How would you decide whether to take the 25 year annuity or the lump sum?

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  1. 30 September, 21:01
    0
    Interest rate can be calculated using calculator

    a) Insert N = 25, PMT = 23.6, PV = - 334, FV = 0 = > Compute I/Y = 5.0%

    b)

    you should take the lump sum payment - IF you could earn a rate higher than 5%

    you should take annuity - IF your required return is below 5%
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