You just won the lottery. You and your heirs will receive $25,000 per year forever, beginning one year from now. If the present value of the lottery is $416,667, what is the discount rate used to value
This perpetuity?

Question

Quizplus · Accepted Answer

The present value of a perpetuity can be calculated using the following formula: PV = PMT / r, where PV is the present value, PMT is the amount of the payment each period (in this case, $25,000 per year), and r is the discount rate. Plugging in the numbers given, we get:

416,667 = 25,000 / r

Solving for r, we get r = 6.0%. Therefore, the discount rate used to value this perpetuity is 6.0%.

You Just Won the Lottery