Accounting Math
Please how do i calculate this problem.
Your girlfriend just won the Power Ball lottery. She has the choice of $10,000,000 today or a 30-year annuity of $500,000, with the first payment coming today. What rate of return is built into the annuity?
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Answers
To calculate the rate of return of the annuity, we need to use the present value formula. The present value formula is P = A * (1 + r)^−n, where P is the present value, A is the future value, r is the discount rate, and n is the number of periods. In this case, the present value is $10 million, the future value is $500,000, and the number of periods is 30 years. We can rearrange the equation and solve for the discount rate to find the rate of return of the annuity: r = (P/A)1/n – 1 = (10,000,000/500,000)-1 = 20 – 1 = 19 Therefore, the rate of return of the annuity is 19%. This means that she would receive a 19% return on her money if she chose the annuity.
