Question

You have just won a lottery! You will receive $50,000 a year beginning one year from now for 20 years. If your required rate of return is 10%, what is the present value of your winning lottery ticket

Answer 1

The prize is worth $425,678.19.

Step-by-step explanation:

Giving the following information:

Cash flow= $50,000

The number of years= 20 years.

Rate of return= 10%

First, we need to calculate the final value using the following formula:

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

A= annual cash flow

FV= {50,000*[(1.1^20)-1]}/0.1

FV= $2,863,749.98

Now, the present value:

PV= FV/(1+i)^n

PV= 2,863,749.98/(1.1^20)

PV= $425,678.19