Question

Part C A local government is about to run a lottery but does not want to be involved in the payoff if a winner picks an annuity payoff. The government contracts with a trust to pay the lump-sum payout to the trust and have the trust (probably a local bank) pay the annual payments. The first winner of the lottery chooses the annuity and will receive $150,000 a year for the next 25 years. The local government will give the trust $2,000,000 to pay for this annuity. What investment rat

Answer 1

Answer:

Government to trust G=$2,000,000

Annuity Payment A=$150,000

Periods for annuity N=25 years

Let r be the investment rate

So G=A*(1-(1+r)^-N)/r

2,000,000=150,000*(1-(1+r)^-25)/r

So solving for r we get investment rate r=5.56%