Author Question: You have a choice between a lottery lump sum payout of 5,975,191.24 today or a series of twenty ... (Read 92 times)

Chelseaamend · **on:** Jul 10, 2018

You have a choice between a lottery lump sum payout of 5,975,191.24 today or a series of twenty annual annuity payments of 500,000 each (first cash flow one year from today). At what discount rate are you indifferent between the two choices?

A) 4.50
B) 5.50
C) 6.50
D) 7.50

Question 2

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

dudman123 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: B
Explanation: B) This is an iterative process (trial and error). Solve using the RATE function in Excel.
MODE = END
INPUT 20 ? -5,975,191.24 500,000 0
KEY N I/Y PV PMT FV
CPT 5.50

Answer to Question 2

Answer: A
Explanation: A)
PMT = PV / = 10,000,000/ = 819,814.81.
MODE = END
INPUT 25 6.5 10,000,000 ? 0
KEY N I/Y PV PMT FV
CPT 819,814.81