Question

Hailey wants to cash in her winning lottery ticket. She can either receive eight $200,000 semiannual payments starting today, based on a 6% annual interest rate, or she can receive a single-amount payment today. What is the single-amount payment she can receive today that would be equivalent to the eight-payment option except that she would not have to wait for years to collect her prize money? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Answer 1

Single Amount She can received today is $1,263,055

Step-by-step explanation:

The Simple Annuity Formula

S=P(1+i)^n

Where

Future Value S=$200,000*8=$1,600,000

Present Value P=??

Semi Annual Interest rate i=6%/2=3%

Number of periods=8

By putting above value in our formula we get

S=P(1+i)^n

$1,600,000=P(1+.03)^8

P=$1,600,000/1.267

P=$1,263,055