Question

Hooray! You won the lottery, but you have a choice of taking the $20,000 per year for the next 20 years or taking a lump settlement today. What would be the minimum amount you would accept today if you decide that 8% is a reasonable discount rate

Answer 1

The minimum value is $196,362.95

Step-by-step explanation:

Giving the following information:

Cash flow= $20,000

The number of years= 20 years

Interest rate= 8%

First, we need to calculate the future value of the cash flows. We will use the following formula:

FV= {A*[(1+i)^n-1]}/i

A= cash flow

FV= {20,000*[(1.08^20)-1]} /0.08

FV= $915,239.29

Now, we can calculate the present value. The present value is the minimum value yo accept.

PV= FV/(1+i)^n

PV= 915,239.29/ 1.08^20

PV= $196,362.95