Jodi Jarvis won a $10 million lottery and elected to receive her winnings in 20 equal undiscounted annual installments. After receiving the first 10 installments, Jodi and her husband divorced, and the remaining 10 payments became part of the property settlement. The judge who presided over the divorce proceedings awarded one-half interest in the future lottery payments to Jodi and the other half to her ex-husband. Following the divorce, Jodi decided to sell her interest in the 10 remaining lottery payments to raise the cash needed to open a bakery. An investor has offered Jodi $1,677,520.
Required
| a. | What discount rate did the investor use in calculating the purchase price? |
| b. | If Jodi can invest the money she gets at 6%, which is the better option, keeping the |
annuity
or accepting the investor's offer? Why?
| c. | What needs might Jodi have that would make the investor's offer the preferable |
option,
no matter what the interest rate (within reason)?
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