Question

Randy W. recently won the Western States Lottery. The lottery pays either a total of twenty $325,000 payments per year with the first payment today (i.e., an annuity due), or $3,500,000 today. At what interest rate would Randy be financially indifferent between these two payout choices?

Answer 1

Answer: 8.92%

Step-by-step explanation:

The interest rate that would make Randy indifferent is the one that will discount the twenty payments of $325,000 to $3,500,000 today.

Use Excel's Rate function to find this rate;

=RATE (No of periods, annual payments, present value, future value, Annuity due = 1)

=RATE(20,350000,-3500000,0,1)

= 8.92%