Could someone please help, I am about to pull my hair out over this one, I can f

Question

Could someone please help, I am about to pull my hair out over this one, I can figure out the present value, it is the part b that is throwing me off. Thank you!

Q11. On the way to Stop&Shop, you buy a lottery ticket and win $100,000. The catch is that the money will be paid to to you in two installments: $50,000 today, and $50,000 at the end of 5 years from now.

Q11-a: Assuming an interest rate of 8%, what is the present value of your total lottery payments ?

Q11-b: Suppose that you invest the $50,000 winnings that you receive today and earn 8% annually for the next 5 years. What is the future value of your total lottery payments ?

Explanation / Answer

Q11-a: Assuming an interest rate of 8%, what is the present value of your total lottery payments ?

Present Value = 50000 + 50000/(1.08)^5 = $84029.16

Q11-b: Suppose that you invest the $50,000 winnings that you receive today and earn 8% annually for the next 5 years. What is the future value of your total lottery payments ?

Future Value = 50000*(1.08)^5 + 50000 = $123,466.40

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