Question

your father won a lottery years ago. the value of his winnings at the time was $225,000. he invested this money such that it will provide annual payments of $12,000 a year to his heirs forever. what is the rate of return?

Answer 1

The rate of return on the father's lottery winnings, which are set up to provide annual perpetuity payments to his heirs, is 5.33%.

Step-by-step explanation:

To determine the rate of return, we need to use the concept of perpetuity, where a fixed sum of money is paid out indefinitely. The formula for the present value of a perpetuity is given by PV = PMT / r, where PV is the present value of the lottery winnings, PMT is the annual payment, and r is the rate of return. By rearranging the formula to solve for r, we get r = PMT / PV.

Now, applying the values from the question:

We then calculate the rate of return:

r = $12,000 / $225,000

So, r = 0.0533 or 5.33%

Therefore, the rate of return is 5.33%.