Question

Prizes are often not "worth" as much as claimed. Place a value on a prize of $5,000,000 that is to be received in equal annual payments over the next 20 years, with the first payment beginning today. Assume an interest rate of 7 percent over the 20-year period.A) $2,212,652B) $2,648,504C) $2,833,899D) $2,950,567A

Answer 1

To value a prize of $5,000,000 received in equal annual payments over 20 years with an interest rate of 7%, we need to calculate the present value using the present value formula.

Step-by-step explanation:

To place a value on a prize of $5,000,000 that is to be received in equal annual payments over the next 20 years, we can use the concept of present value.

Present value is the current worth of future cash flows, taking into account the time value of money.

In this case, we need to calculate the present value of the annual payments using an interest rate of 7% over the 20-year period.

The present value formula is:

Present Value = Payment / (1 + Interest Rate)^Number of Years

Using this formula, we can find that the value of the prize is approximately $2,833,899 (option C).

Answer 2

C) $2,833,899

Step-by-step explanation:

This is an "annuity due " type of question, it is asking for the Present value (PV) or present worth of an annually recurring equal payment; PMT.

First, divide 5,000,000 by 20 to get equal payment = 250,000

Using a financial calculator on "BGN" mode, input the following;

N= 20

I/Y = 7%

PMT = 250,000

FV = 0

then compute present value; CPT PV = 2,833,898.81

Therefore, it will be worth $2,833,899