Question

Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 three years from now or taking the present value of the $3,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is:

Answer 1

Answer:

The amount that will be received today is $2518857.85

Explanation:

To calculate the amount that will be received today, we need to discount the amount that will be received three years from now for a period of 3 years using the given discount rate. As there is only a single cash flow, we will use the formula for present value of principal.

The present value of principal is,

Present value = Cash flow / (1+d)^t

Where,

• Cash flow is the amount for which we have to found the present value
• d is the discount rate
• t is the time in terms of number of periods
• Here the t is in years and the number of periods is 3 years

Present value = 3000000 / (1+0.06)^3

Present value = 2518857.849 rounded off to $2518857.85