Congratulation,you just won the $1 million grand prize in the state lottery.You have to choose how to receive your prize.You can either get a lump sum of $350,000 today,or you can get $50,000 each year forever.You should choose the perpetuity of $50,000 if the interest rate is:

Question

Quizplus · Accepted Answer

Choosing the perpetuity of $50,000 per year will be better if the interest rate is lower than 14.3%. This is because if the interest rate is less than 14.3%, the present value of $50,000 per year forever is greater than $350,000. If the interest rate is higher than 14.3%, the lump sum of $350,000 would have a greater present value than the perpetuity of $50,000 per year. The given interest rate of 17.5% is higher than 14.3%, so it is not the best choice.

Congratulation,you Just Won the $1 Million Grand Prize in the State