Question

Freida Farmer, 78 years young, from Karnak, IL has the winning Powerball lottery numbers which will pay out $7 million at the beginning of each of the next 30 years (reported prize of $210 million). Before claiming her prize, Dependable Insurance Company offers Frieda $100 million today in exchange for her winning lottery ticket and prize payout. What rate of return would Dependable Insurance earn if Frieda accepts their offer

Answer 1

Answer:

6.218%

Explanation:

we can use the present value of an annuity due formula:

present value = annual payment x annuity due factor

• present value = 100
• annual payment = 7
• PV annuity due factor, %, 30 periods = ?

100 = 7 x annuity factor

annuity factor = 100 / 7 = 14.28571429 ≈ 14.286

using an annuity calculator, the interest rate for a PV annuity factor, 30 periods and equal to 14.286 is 6.218%