Question

Graciela Treadwell won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 percent on any investment she makes, what is the minimum amount she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.

A. $235,700
B. $750,000
C. $334,600
D. $212,400

Answer 1

Answer: A. $235,700

Step-by-step explanation:

Minimum value will be the present value of the yearly payments for the next 30 years at 10%.

This is a steady amount so it is an annuity.

Present value of annuity = 25,000 * Present value annuity factor, 30 years , 10%

= 25,000 * 9.4269

= $‭235,672.5‬

= $‭235,700