Question

Bob's lottery inc. Has decided to offer winners a choice of $225,000 in 10 years or some amount currently. Assume that bob's lottery inc. Earns a 12 percent after-tax rate of return. What amount should bob offer lottery winners currently, in order for him to be indifferent between the two choices

Answer 1

In order to calculate the amount Bob has to pay the lottery winners currently, Bob has to calculate the present value of the 225,000 that is to be paid after 10 years

Future value (FV)= 225,000

Number of years (n) = 10

Interest rate (r) = 12% = 0.12

Present value (PV) = FV/(1+r)^n

Present value (PV) = 225,000/(1+0.12)^10

Present value (PV) = 225,000/1.12^10

Present value (PV) = $72,443.98

Amount should bob offer lottery winners currently = $72,443.98