Question

You win a lottery with a prize of $1.5 million. Unfortunately the prize is paid in 10 equal annual installments. The first payment is next year. How much is the prize really worth

Answer 1

The prize is really worth $1,006,512.21.

What is present value?

Present value is the sum of cash flows discounted at the rate of interest or the discount rate.  The annual cash flows for the next 10 years = $1.5 million / 10 = 150,000

The present value can be determined using a financial calculator

Cash flow from year 1 to 10 = $150,000

Discount rate = 8%

Present value = $1,006,512.21

Here is the complete question: You win a lottery with a prize of $1.5 million. Unfortunately the prize is paid in 10 an¬nual installments. The first payment is next year. How much is the prize really worth? The discount rate is 8 percent.

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