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Calculate the amount of the lump sum payment

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Reference no: EM133009676

Today is October 31st, 2020. You have just won $1,000,000 in the lottery. The terms of the lottery are as follows:

  • $100,000 per year for 7 years and $50,000 per year for the following 6 years. The first payment will be received on April 30th, 2021 with successive payments to be received annually from that date.
  • you will receive a lump sum today (October 31st, 2020).
  • Effective annual interest rates are 5% until May 1st, 2027 when they are expected to rise to 6% and remain there indefinitely.

Required:

Problem 1: Calculate the amount of the lump sum payment that would leave you indifferent between the two proposals.

Reference no: EM133009676

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