Question

You just won the lottery! The state gives you the choice of $1,000,000 today or a 10-year annuity of $128,000 with the first payment coming one year from today. What is the rate of return built into the annuity

Answer 1

The rate of return built into the annuity is approximately 4.97%.

Step-by-step explanation:

The rate of return built into the annuity can be calculated by comparing the present value of the annuity to the present value of the lump sum payment. The present value of the annuity can be found using the formula:

Present Value = Payment / (1 + r)n

where r is the annual interest rate and n is the number of years. In this case, the present value of the annuity is $1,000,000, the payment is $128,000 per year, and the number of years is 10. By rearranging the formula and solving for r, we can find the rate of return built into the annuity.

Solving the equation, we get:

1,000,000 = 128,000 / (1 + r)10

Using a calculator or software, we can find that the rate of return built into the annuity is approximately 4.97%.