Answered

Westonci.ca is the ultimate Q&A platform, offering detailed and reliable answers from a knowledgeable community. Experience the convenience of finding accurate answers to your questions from knowledgeable professionals on our platform. Connect with a community of professionals ready to provide precise solutions to your questions quickly and accurately.

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 rate must the trust earn to break even on this arrangement

Sagot :

abiolataiwo2015

If the first winner of the lottery chooses the annuity and will receive $150,000 a year for the next 25 years. The investment rate the trust must earn to break even on this arrangement is: 5.56%.

Investment rate earn to breakeven

Given data:

Initial deposit = $2,000,000

Annual payment = $150,000

Number of years = 25 years

Using this formula to find  the interest rate on the annuity by solving for I:

PV=PMT×1−(1+I)−^N/I

Where:

Present value (PV) = -2,000,000

Number of years (N) = 25

Periodic payment (PMT) =-150,000

Future value=0

Interest rate=I/Y = ?

Hence,

$2,000,000=$150,000×1−(1+I)−^25/I

Using a financial calculator to find interest rate(I/Y ) by inputting the below data

N = 25

I/Y = ?

PV = 2,000,000

PMT = -150,000

FV = 0

Hence,

CPT I/Y  = 5.56%

Therefore If the first winner of the lottery chooses the annuity and will receive $150,000 a year for the next 25 years. The investment rate the trust must earn to break even on this arrangement is: 5.56%.

Learn more about investment rate here:https://brainly.com/question/2294792

#SPJ1

Thank you for your visit. We're dedicated to helping you find the information you need, whenever you need it. Thanks for stopping by. We strive to provide the best answers for all your questions. See you again soon. Thank you for visiting Westonci.ca. Stay informed by coming back for more detailed answers.