Dr.Arrowhead will receive $150,000 per year for the next 20 years as an ordinary annuity payment...

Dr.Arrowhead will receive $150,000 per year for the next 20 years as an ordinary annuity payment for a high-tech slingshot weapon he invented. If a 6 percent rate is applied, should he be willing to sell out his future rights now for $2,000,000?

Expert Solution

Given that,

Dr. Arrowhead will receive PMT = $150000 per year for next t = 20 years

interst rate r = 6%

So, PV of the annuity should be

PV = PMT*(1 - (1+r)^-t)/r = 150000*(1 - 1.06^-20)/0.06 = $1720488.18

Since PV of the annuity is less than $2000000 at 6% interest rate, If he sell out the future rights, he will receive a higher rate. So, Dr. Arrowhead should be willing to sell out his future right.

jeff jeffy answered 2 years ago

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