Question

Your brother just won the Power Ball lottery

Your brother just won the Power Ball lottery. He has the choice of $10,000,000 today or 30-year annuity of $500,000, with the first payment coming today. What rate of return is built into the annuity?

Solutions

Expert Solution
Let the built-in interest rate be constant and equal to i.
The future value of the lump sum, S, after 30 years is
S=10000000*(1+i)^30
The future value of the 30 installments, P, at the end of the payments is:
500000*((1+i)^30-1)/i
Equate S and P and solve by the bisection method or trial and error.
I get about 2.8%.
answered by: nenette


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