You have won a lottery prize that promises to pay you and your descendants $1,000 a year forever.If the lowest price you are willing to sell this perpetuity for is $20,000,then you must be assuming that the relevant interest rate is

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Quizplus · Accepted Answer

The formula for the present value of a perpetuity is PV = C / r, where PV is the present value, C is the annual payment, and r is the interest rate. Plugging in the values given ($20,000 for PV and $1,000 for C), we get $20,000 = $1,000 / r. Solving for r gives us 0.05, or 5%.

You Have Won a Lottery Prize That Promises to Pay