Question

Lottery. Your dreams of becoming rich have just come true. You have won the State of​ Tranquility's Lottery. The State offers you two payment plans for the ​$6 comma 000 comma 000 advertised jackpot. You can take annual payments of ​$150 comma 000 at the end of the year for the next 40 years or ​$1 comma 466 comma 858 today. a. If your investment rate over the next 40 years is 11​%, which payoff will you​ choose? b. If your investment rate over the next 40 years is 9​%, which payoff will you​ choose? c. At what investment rate will the annuity stream of ​$150 comma 000 be the same as the​ lump-sum payment of ​$1 comma 466 comma 858​?

Answer 1

A=1466858

B=$150000

C=10%

Step-by-step explanation:

A)

Present value of $150000 at 11% for 40 years;

Using excel PV function: PV(11%,40,-150000) = $1342657.623

Therefore, 1466858 should be selected.

B)

Present value of $150000 at 9% for 40 years

= PV(9%,40,-150000) = $1613604.03

Therefore payment of $150000 should be selected

C)

Using excel rate function: RATE(40,-150000,1466858)

= 10%