thanks for your calculations. the online calculators do not seem that simple to use. some limit you to a 5 year period etc. any suggestions for a site with a npv calculator which is relatively easy to use?
The easiest one is in Excel. Just open up a blank spreadsheet, choose Insert, Formula, PV, and it explains to you what each item means and how to insert your assumptions. FYI: the present value of a stream of 20 annual payments of $50K each, where the payment is made at the beginning of the year is as follows: Interest rate 5%: $654,266 Interest rate 8%: $530,180 Interest rate 10%: $468,246 And yes, the value does go down as the interest rate goes up. Obviously, these are pre-tax amounts, and the assumption is that the interest rate remains the same throughout the life of the investment. These are the reasons why any buyer of such an annuity would pay far less than the amounts above, because he is bearing interest rate risk, and given his own tax situation and available alternative investments with similar risk structure.
it is true that everybody's financial situation is different what implied rate of return would it take to get this deal done there is a market out there for this kind of deal. it seems to be a niche market probably not highly competitive which is the reason these commercial firms are discounting the rate so highly.. if for example this particular lottery ticket could be securitized and be part of a pool the discount rate would be much lower. this is not the case at this time. the question is what implied gross rate of return would entice at least one person to do this deal. for example if commercial firms are doing at a 15 oer cent discounted rate can a private person be found to do it at 14% 13% etc.
Here is an idea or 2: Idea 1: Put the ticket up for sale on Ebay and see what you get. Idea 2: Sell raffle tickets for $10 each and anyone can buy as many as they want, but once you collect $400k, all the tickets are sold. This way your friend gets his $400k and someone else gets his own version of hitting the lottery for $10! (just like your friend did in the first place to win the money!) cheers.
THats a hell of alot of tickets to sell....he's not going to get 400k for that, he'll be lucky to get 300, and just over 200k is where the deal gets done for most investors.
This subject is laughable! If it is what you say, many of investment type companies will gladly give him what he is asking. Anyone with basic Finance knowledge knows this. Just do a tid bit of research on the net.
It is obviously a joke, but nonetheless, still fun to do a 'what if'. Someone obviously was in a class and the professor (probrably finance!) aske their students about this kind of situation. Like I said before, this is just a good exercise in present value of annuities and nothing else. Even if the guy was not terminally ill, he would still be wise to try and sell the ticket to someone who would fork over 400k right now. If I was his financial advisor, I would certainly advise him not to head immediately to the lottery headquarters to collect the annuity, but rather see if he could get some sucker to fork over 400k today for the ticket! I would then advise him to take that 400k, invest it in some stocks and have a nice day! cheers.