You win your state lottery. The lottery officials offer you the following options: you can accept annual payments of $50,000 for 20 years or receive an upfront payment of $700,000. Ignoring issues like mortality tables, taxes, etc.; and assuming the first payment is made immediately, what market interest rate would make it more attractive to take the upfront payment?
What will be an ideal response?
Using a financial calculator or a spreadsheet we can equate the $700,000 to the sum of the present value flow of receiving $50,000 a year for the next 20 years, and the internal rate of return is 4.121%. If you are confident that you can earn an average annual return greater than 4.121% a year over the next 20 years, the upfront payment may be the option to select.
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