After winning the lottery, you state that you are indifferent between receiving twenty $500,000 end-of-the-year payments (first payment one year from today), or a lump sum of $5,734,961 today
What interest rate are you using in your decision-making process such that you are indifferent between the two choices?
A) 5.00%
B) 6.00%
C) 7.00%
D) 8.00%
Answer: B
Explanation: B) This is an iterative process (trial and error). Solve using the RATE function in Excel.
MODE = END
INPUT 20 ? -5,734,961 500,000 0
KEY N I/Y PV PMT FV
CPT 6.00
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