Suppose you just won the state lottery, and you have two options: (1) receiving $2,550,000 now or (2) receiving a 20-year annuity with $250,000 payment at the end of each year. What rate of return is built into the annuity to make you indifferent with these two options?        A)  7.12%   B)  7.87%   C)  8.26%   D)  7.49%   E)  8.67%

Q: Suppose you just won the state lottery, and you have a choice between receiving $3,550,000 today or…

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A:

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Q: how large must the annual annuity payments be to make you indifferent between the two​ choices?

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.