Randy W.recently won the Western States Lottery of $6,500,000.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?
A)5.37%
B)7.36%
C)7.76%
D)8.00%

Question

Quizplus · Accepted Answer

The interest rate at which Randy would be indifferent between the two options is the rate that equates the present value of the annuity due to the lump sum payment. Using the formula for the present value of an annuity due and solving for the interest rate, the correct rate is approximately 7.76%.

Randy WRecently Won the Western States Lottery of $6,500,000