Question

You’ve just won the lottery, congratulations. You and your heirs will receive $35,000 per year forever, with the first payment received at the end of the first year. If the appropriate discount rate is 8%, what is the present value of your prize?

Answer 1

Present Value= $437,500

Step-by-step explanation:

Giving the following information:

You and your heirs will receive $35,000 per year forever, with the first payment received at the end of the first year. The appropriate discount rate is 8%.

We need to find the present value of a perpetual annuity. To do that, we will use the following formula:

PV= Cf/i

Cf= cash flow= 35,000

i= 0.08

PV= 35,000/0.08= $437,500