You have a choice between a lottery lump sum payout of $10,000,000 today or a series of twenty-five annual annuity payments (first payment one year from today).At a discount rate of 6.50%,how large must the annual annuity payments be to make you indifferent between the two choices?
A)$819,814.81
B)$873,102.77
C)$769,779.17
D)$400,000.00

Question

Quizplus · Accepted Answer

The present value of the annuity payments must be equal to the lump sum payout. The present value of an annuity is calculated as follows:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present valuePMT is the annual paymentr is the discount raten is the number of yearsIn this case, we have:PV = $10,000,000r = 6.50%n = 25Solving for PMT, we get:PMT = $819,814.81Therefore, the annual annuity payments must be $819,814.81 to make the individual indifferent between the two choices.

You Have a Choice Between a Lottery Lump Sum Payout