Question

You win a lottery with a prize of $1.5 million. unfortunately the prize is paid in 10 equal annual installments. the first payment is next year. how much is the prize really worth? the discount rate is 8 %.

Answer 1

Answer:

PV= $1,006,512.21

Explanation:

Giving the following information:

Annual payments= $150,000

Discount rate= 8%

Number of periods= 10 years

First, we need to calculate the future value using the following formula:

FV= {A*[(1+i)^n-1]}/i

A= annual payment

FV= {150,000*[(1.08^10) - 1]} / 0.08

FV= $2,172,984.37

Now, we can determine the present value:

PV= FV/(1+i)^n

PV= 2,172,984.37/(1.08^10)

PV= $1,006,512.21