Question

You just won the NEU lottery. You have the choice of $12,000,000 today or a 20-year annuity of $800,000, with the first payment coming one year from today. What rate of return is built into the annuity?

Answer 1

Answer:

2.91%

Explanation:

PMT = 800,000 (Annual amount that you receive)

n = 20 years

PV = -12,000,000 (the amount you should have if you receive a lump-sum today)

FV = 0 (not given)

i/r = ? (The rate of return we need to find)

Using financial calculator, we have the rate of return built into the annuity is:

i/r = 2.91%