Suppose you just won the state lottery, and you have a choice between receiving $2,625,000 today or a 20-year annuity of $270,000,with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Rate of return inbuilt in annuity is rate at which present value of annuity is equals to amount of…

you just won the state lottery, and you have a choice between receiving $2,625,000 today or a 20-year annuity of $270,000, Suppose with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

you just won the state lottery, and you have a choice between receiving $2,625,000 today or a 20-year annuity of $270,000, Suppose with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

Suppose you just won the state lottery, and you have a choice between receiving $2,625,000 today or a 20-year annuity of $270,000,
with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

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