You have just won the lottery! You can either receive $5,000 a year for 15 years or $50,000 as a lump sum payment today.What is the interest rate on the annuity option?

Question

Quizplus · Accepted Answer

The interest rate on the annuity option is 5.56 percent. This is because the present value of the annuity is equal to the present value of the lump sum payment, which is $50,000. The present value of the annuity is calculated as follows:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present value of the annuityPMT is the annual paymentr is the interest raten is the number of yearsIn this case, PMT = $5,000, r = 5.56%, and n = 15. Plugging these values into the formula, we get:PV = $5,000 * [1 - (1 + 0.0556)^-15] / 0.0556PV = $50,000Therefore, the interest rate on the annuity option is 5.56%.

You Have Just Won the Lottery! You Can Either Receive