Question

You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 25 years and the payments will increase by 3.8 percent per year. If the appropriate discount rate is 7.8 percent, what is the present value of your winnings?

Answer 1

To determine the present value of your winnings, you need to calculate the present value of each payment received over the 25-year period. Use the formula: Present Value = Cash Flow / (1 + Discount Rate) ^ Number of Periods. Finally, sum up all the present values of the payments over the 25-year period to find the total present value of your winnings.

Step-by-step explanation:

To determine the present value of your winnings, you need to calculate the present value of each payment received over the 25-year period. The formula to calculate the present value of future cash flows is:

Present Value = Cash Flow / (1 + Discount Rate) ^ Number of Periods

In this case, the cash flow received after one year is $1,000,000, and the discount rate is 7.8%. Since the payments increase by 3.8% per year, you can use the same formula to calculate the present value of each subsequent payment using the number of periods as the difference in years.

Finally, sum up all the present values of the payments over the 25-year period to find the total present value of your winnings.