Question

Suppose you just won the state lottery, and you have a choice between receiving $3,600,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

Select the correct answer.

a. 4.16%

b. 2.56%

c. 2.96%

d. 3.36%

e. 3.76%

Answer 1

Let rate of return be x%

At this rate;present value of annuity=3,600,000

3,600,000=250000/1.0x+250000/1.0x^2+...............+250000/1.0x^20

Hence x=rate of return=3.36%(Approx).