Question

You have just received notification that you have won the $1.4 million first prize in the lottery. However, the prize will be awarded on your 100th birthday, 70 years from now. (Wow, you’re older than I generally think!) The appropriate discount rate is 8%. What is the present value of your winnings?a. $4,288.16
b. $6,404.20
c. $15,309.91
d. $23,333.33
e. $25,000.00

Answer 1

Answer:

b. $6,404.20

Explanation:

Value of prize = $1.4 million = $1,400,000

Amount to be received in years = 70 years

Interest Rate  = 8%

Future value = Present value x ( 1 + interest rate )^-number of years

FV = PV x ( 1 + r )^n

1,400,000 = PV ( 1 + 0.08 )^70

1,400,000 = PV ( 1.08 )^70

1,400,000 / ( 1.08 )^70 = PV

PV = $6404.20

So The present value of the winning is $6,404.20.