Hello, I just solved this question, but I\'m not sure if I did it correctly. I c

Question

Hello, I just solved this question, but I'm not sure if I did it correctly. I considered this a perpetuity since it goes 'forever', but other people in my class said they considered this an annuity, since you can't live forever. Please let me know if I did this wrong, and what I should be doing instead.

Question: You won the ‘set for life’ lottery which promises to pay you $1,000 per month forever starting today. At the end of November of each year you collect a bonus payment of $1,000 to make it easier to purchase presents for the holidays. To make calculations easier suppose that today is Jan 1st. You discount rate is 10% p.a. What is the present value of your price money?

Here is what I did:

For the November (yearly) bonus payment: PVo = (1000/0.1) = $10,000

For the Monthly Payment: (10% p.a) / (12 months) = 0.83333% = 0.008333

PVo = (1000) / (0.008333) = $120,000

Therefore the ‘set for life’ lottery PV would be the addition of the two previous calculated Present Values.

$120,000 + $10,000 = $130,000

Explanation / Answer

Answer: Calculation of present value:

Bonus payment=$1000/0.10=$10000

Lottery present value=$1000/(0.0083333)=$120000

Total Present value=$120000+$10000

=$130000

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