Question

Maria Miller, a lottery winner, will receive the following payments over the next seven years. She has been approached by an investor who will pay Maria a lump sum today for the rights to those future cash flows. If she can invest her cash flows in a fund that will earn 9.8 percent annually, how much should Maria require the investor to pay for the cash flows? (Round answer to 2 decimal places, e.g. 15.25. Do not round factor values.)

Answer 1

Question Completion:

Year   1             2          3              4               5                 6            7              

$241,000 $291,000 $316,000 $341,000 $391,000 $441,000 $591,000

Present value of investment$

Answer:

Maria Miller

The lump sum collection by Maria Miller should be:

= $1,738,016.85

Explanation:

a) Data and Calculations:

Cash flows from year 1 to year 7:

          Future Value    Present Value

Year 1    $241,000        $219,490.04

Year 2   $291,000          241,372.92

Year 3   $316,000          238,715.06

Year 4   $341,000          234,609.12

Year 5  $391,000          244,999.21

Year 6  $441,000          251,665.93

Year 7  $591,000           307,164.57

Total $2,612,000      $1,738,016.85

b) The amount that Maria Miller should request today for her annual cash flows at 9.8% interest annually should be $1,738,016.85.  This is the present value of the future cash flows.  The above present values of the cash flows were obtained using an online calculator.