Gary won a lottery that will pay him $700000 at the end of each of the next twenty years. Blue Spruce has offered to purchase the payment stream for $7413000. What interest rate (to the nearest percent) was used to determine the amount of the payment?

Gary won a lottery that will pay him $700000 at the end of each of the next twenty years. Blue Spruce has offered to purchase the payment stream for $7413000. What interest rate (to the nearest percent) was used to determine the amount of the payment?

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter3: Income Sources

Section: Chapter Questions

Problem 97IIP

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

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