After winning the lottery, you state that you are indifferent between receiving twenty 500,000 end-of-the-year payments (first payment one year from today), or a lump sum of 5,734,961 today.
What interest rate are you using in your decision-making process such that you are indifferent between the two choices?
A) 5.00
B) 6.00
C) 7.00
D) 8.00
Question 2
You have won the lottery and received a check for 1,275,156 today. You invest the lottery check today at an annual interest rate of 8 and allow it to build for a full ten years.
At that point in time, you shift the money to an account paying only 6 per year. You plan to spend 175,000 per year in retirement (assume equal annual end-of-the-year cash flows) for 30 years, and your first retirement cash flow is exactly eleven years from today. Will you have enough money to fully fund your desired retirement? Use a calculator to determine your answer.
A) Yes, because your investment will allow you to spend up to 225,000 per year in retirement.
B) No, because your investment will allow you to spend up to only 158,000 per year in retirement.
C) Yes, because your investment will allow you to spend up to 200,000 per year in retirement.
D) No, because your investment will allow you to spend up to only 137,000 per year in retirement.
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