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Joe Smith, age 75, from Vienna, IL has the winning Powerball lottery numbers which will pay...

Joe Smith, age 75, from Vienna, IL has the winning Powerball lottery numbers which will pay out $13 million at the beginning of each of the next 30 years (reported prize of $390 million). Before claiming his prize, Trusty Insurance Company offers Joe $200 million today in exchange for his winning lottery ticket and prize payout. What rate of return would Trusty Insurance earn if Joe accepts their offer?

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Expert Solution

Amount to be paid today as winning amount 200
Divide: Annual amount to be paid for 30 years 13
Annuity PVF for 30 years 15.384615
Rate at which this annuity PVF occur 4.99%
Thus, rate of return earned on acceptance is 4.99%

jeff jeffy answered 2 years ago
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