Question

Mario won the lottery and is receiving payments of $1,521,875 a year for the next 19 years. However, he has decided to sell this income stream and has been offered $9,968,843 for the remaining lottery payments. What is the discount rate used by the potential buyer?

Answer 1

Solution:

The calculation of interest rates using the financial calculator for these inputs;

PV = -$9,968,843;

PMT = $1,521,875;

N = 19;

FV = 0;

CPT I/Y = 13.9999% or approximately 14%

The discount rate used by the potential buyer is approximately 14%