Question

Jose wants to cash in his winning lottery ticket. He can either receive five $5,000 annual payments starting today, or he can receive a lump-sum payment now based on a 3% annual interest rate. What would be the lump-sum payment? a. $23,586. b. $22,899. c. $21,565. d. $23,000.

Answer 1

Answer:

a. $23,586

Explanation:

To find the value of the lump sum payments, calculate the present value.

Present value is the sum of after tax cash flows derived from an investment.

Present value can be calculated using a financial calculator:

Cash flow each year from year 0 to 4 = $5000

Discount rate = 3%

Present value = $23,586

To find the present value using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you