You have just won a contest! You can either receive $10,000 a year for 15 years or $100,000 as a lump sum payment today. What is the interest rate on the annuity option?

Question

Quizplus · Accepted Answer

To calculate the interest rate on the annuity option, we can use the present value formula: PV = Payment / (r * ((1 + r)^n - 1)), where PV is the present value, Payment is the annual payment, r is the interest rate, and n is the number of years. Plugging in the given values, we get:
$10,000 = Payment / (r * ((1 + r)^15 - 1))
Solving for r using a financial calculator or spreadsheet, we get an interest rate of 5.56 percent. Therefore, the best choice would be to take the lump sum payment of $100,000 today and invest it at a higher rate than the annuity option.

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