Question

A major lottery advertises that it pays the winner $10 million. However, this prize money is paid at the rate of $ 500,000 each year (with the first payment being immediate) for a total of 20 payments. What is the present value of this prize at 10% annual interest?

Answer 1

Answer:

We have to discount these payments to find the present value

500,000

500,000/1.1

500,000/1.1^2

500,000/1.1^3

We keep on doing this until we reach 500,000/1.1^19

After that we add all the payments and get the value. A less time consuming way of doing it is using a financial calculator

Pv=?

N=19

FV=0

PMT=500,000

=4,182,460.05 we add 500,000 to this because the first payment was not discounted=4,682,460.05= Present Value.

Explanation: