Question

You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $21,500 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?

Answer 1

Answer:

present value = $398148.15

Explanation:

payment = $21,500

payments increase = 2.5 %

discount rate = 7.9 %

to find out

present value of your prize

solution

present value of prize is express as

present value = $\frac{payment}{discount rate-payment increase}$

put here value

present value = $\frac{21500}{0.079-0.025}$

present value = $398148.15