Question

A state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year). How much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? How much must the state invest if the annual payments were made at the beginning of the year?

Answer 1

Answer and Explanation:

The computation is shown below:

The amount that should be invested in the case when it earns 7% on its funds is

Investment = pv(7%,20,200000,0,0)

= $2,118,802.85

ANd, the amount that should be invested at the starting of the year is

= pv(7%,20,200000,0,1)

= $2,267,119.05

The same should be considered