You have just received notification that you have won the $600,000 first prize i
ID: 2727149 • Letter: Y
Question
You have just received notification that you have won the $600,000 first prize in the Centennial Lottery to be awarded on your 100th birthday, which is 70 years from now. However, you have an option to take a lump sum now, which is the discounted present value of the prize. The Lottery Commission uses a 5% discount rate to determine the present value of your winnings. What is the lump sum you can collect now until waiting until your 100th birthday?
$6,404.20
$12,876.50
$19,719.70
$26,333.33
$37,418.69
$6,404.20
$12,876.50
$19,719.70
$26,333.33
$37,418.69
Explanation / Answer
Formula:
PV = FV / (1 + r) n
PV = Present Value
FV = Future Value (Money to received in the Future)
I = Discount Rate
N= Number of periods until FV is received
FV = 600,000; I = 5%; n = 70
PV = $600,000 / (1 + 0.05)70 = $19,719.7
Answer: $19,719.70
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