After winning the lottery,you state that you are indifferent between receiving twenty $500,000 end-of-the-year payments (first payment one year from today),or a lump sum of $5,734,961 today.What interest rate are you using in your decision-making process such that you are indifferent between the two choices?
A)5.00%
B)6.00%
C)7.00%
D)8.00%

Question

Quizplus · Accepted Answer

By using a present value calculator, we can find that the present value of twenty $500,000 end-of-the-year payments is $5,734,961 when the interest rate is 6%. Therefore, if the interest rate used in the decision-making process is 6%, the person would be indifferent between the two choices. Any interest rate lower than 6% would make the lump sum option the better choice, and any interest rate higher than 6% would make the annuity payments the better choice.

After Winning the Lottery,you State That You Are Indifferent Between