Question

Martha Gentry won a $16,800,000 lottery and elected to receive her winnings in 30 equal annual installments. After receiving the first 10 installments, Martha and her husband divorced, and the remaining 20 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 Martha and the other half to her ex-husband. Following the divorce, Martha decided to sell her interest in the 20 remaining lottery payments to raise the cash needed to open a flower store. An investor has offered Martha $2,555,980.What discount rate did the investor use in calculating the purchase price?

Answer 1

Answer:

Discount Rate = 9%

Explanation:

Martha won: $16,800,000

Number of installments = 30

The annual payment = amount won/ number of installments

= 16,800,000 / 30 = $560,000

___________________________

Individual share of 50% each = $560,000 * 50% = $280,000

Since the investor offered Martha $2,555,980 which is the future value for the remaining period of 20 years, we have:

Future Value = Present Value x PVAF (I, 20 Years)

$2,555,980 = $280,000 × PVIFA (I, 20 years)

PVIFA (I, 20 years) = 2555980/280000

PVIFA (I, 20 years) = 9.1285

From Present value annuity Tables, the factor value for 20 years 9.1285 is for 9%

Therefore, the discount rate the investor used in calculating the purchase price is 9%