They couldn't use the risk free rate because the investment is too long-term... there is always inflation risk. The rate they use must be higher.
But yes, looking at some rates, 7% might be too high: 30 year T-Bonds are at 5.375% But you also have to consider that the winner could re-invest in a risky security (mutual funds) which would have expected returns much higher.
And the government would have every incentive to push up this DR - the greater the rate, the less the lump sum payment they have to make.
Edit: they used 8.237%
340M over 20 years = 17M PMT
164.4 was the lump sum = PV
20 =N
8.237% = i
Much, much higher than the risk-free rate. Once again proving that the lottery is gay.
[ October 20, 2005, 08:07 PM: Message edited by: DJ FC ]
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