Question

Congratulations, you've won the lottery! The jackpot was $10,000,000, and you have an important choice to make. You can either take your winnings in annual payments of $500,000 spread out over 20 payments (with the first payment coming immediately and then at the end of each year for the next 19 years), or you can take a one-time payment of $6,600,000 right now. What is the present value of your winnings if you opt for the annual payments and the market interest rate is 5%

Answer 1

$6,542,660.43

Step-by-step explanation:

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow each year from year 0 to 19 = $500,000

I = 5%

PV = $6,542,660.43

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.