Question

9. Assume that you just won $35 million in the Florida lottery, and hence the state will pay you 20 annual payments of $1.75 million each beginning immediately. If the rate of return on securities of similar risk to the lottery earning (e.g, the rate on 20 year US Treasury bonds) is 6 percent, what is the present value of your winning

Answer 1

Answer:

$11.47 million

Explanation:

The present value of an annuity is determined by:

$PV = P*[\frac{1-(1+r)^{-n}}{r}]$

With annual payments (P) of $1.75 million, for a period (n) of 20 years at a discount rate (r) of 6 percent, the present value is:

$PV = 1.75*[\frac{1-(1+0.06)^{-20}}{0.06}]\\PV=\ 11.47\ million$

The present value of your winning is $11.47 million