Question

The super prize in a contest is $10 million. This prize will be paid out in equal yearly payments over the next 20 years. If the prize money is guaranteed by AAA bonds yielding 4% and is placed into an escrow account when the contest is announced 1 year before the first payment, how much do the contest sponsors have to deposit in the escrow account? (Round your answer to the nearest cent.)

Answer 1

Answer:

contest sponsors have to deposit $6795163.17 in the escrow account

Explanation:

given data

amount = $10 million

time = 20 year

rate = 4 %

to find out

how much do the contest sponsors have to deposit in the escrow account

solution

we know Cash flow per period = 10000000/20 = $500000

we will apply here future value formula to find amount

future value = cash flow × $\frac{1-(1+r)^{-t}}{r}$

here r is rate and t is time

put here value

future value = 500000 × $\frac{1-(1+0.04)^{-20}}{0.04}$

future value = 6795163.1724

so contest sponsors have to deposit $6795163.17 in the escrow account