Question

A local magazine is offering a $5,000 grand prize to one lucky winner. The prize will be paid in five annual payments of $1,000 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 8 percent on your money

Answer 1

Answer:

The prize is worth $3,992.71

Explanation:

Giving the following information:

Cash flow= $1,000 per year for 5 years

Interest rate= 8%

To calculate the value of the prize today, first, we need to calculate the final value:

FV= {A*[(1+i)^n-1]}/i

A= annual payment

FV= {1,000*[(1.08^5)-1]}/0.08

FV= $5,866.60

Now, the present value:

PV= FV/(1+i)^n

PV= 5,866.6/ (1.08^5)

PV= $3,992.71