Martha Gentry won an $18 million lottery and elected to receive her winnings in 30 equal annual

Question:

Martha Gentry won an $18 million lottery and elected to receive her winnings in 30 equal annual installments. After receiving the first 10 installments, Martha and her husband divorced, and the remaining 20 payments became part of the property settlement. The judge who presided over the divorce proceedings awarded one-half interest in the future lottery payments to Martha and the other half to her ex-husband.

Following the divorce, Martha decided to sell her interest in the 20 remaining lottery payments to raise the cash needed to open a flower store. An investor has offered Martha $2,945,430.

Required

a. What discount rate did the investor use in calculating the purchase price?

b. If Martha can invest the money she gets at 6%, which is the better option, keeping the annuity or accepting the investor's offer? Why?

c. What needs might Martha have that would make the investor's offer the preferable option, no matter what the interest rate (within reason)?

Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...