Question

A local magazine is offering a $2,500 grand prize to one lucky winner. $1,000 will be paid on the day of the drawing. the remaining $1,500 will be paid in three annual payments of $500 each, starting one year after the drawing. how much would this prize be worth to you if you can earn 9 percent on your money?

Answer 1

This problem considers simple interest formula. It is:

`A=I*( 1+ (r)/(100) )^(n)`
Where
A= total amount after some time
I = initial amount
r = rate
n = number of years

Total prize we will receive is:
Total = $1000 + $500 after one year + $500 after two years + $500 after three years.

Now we need to calculate how much we will earn after each year:
Year 1:

`A=500* (1+ (9)/(100))^(1) = 545`
Year 2:

`A=500* (1+ (9)/(100))^(2) = 594,05`
Year 3:

`A=500* (1+ (9)/(100))^(3) = 647,51`

So total amount is:
Total = $10000 + $545 + $594,05 + $647,51
Total = $2786,56