You have just won the lottery and will receive $500,000 in one year. You will re

Question

You have just won the lottery and will receive $500,000 in one year. You will receive payments for 29 years, and the payments will increase 4 percent per year. If the appropriate discount rate is 12 percent, what is the present value of your winnings?

You have just won the lottery and will receive $500,000 in one year. You will receive payments for 29 years, and the payments will increase 4 percent per year. If the appropriate discount rate is 12 percent, what is the present value of your winnings?

Explanation / Answer

PV of growing annuity.

PV = 500000/(0.12-0.04)

   [1-(1.04/1.12)^29]

PV = $6250000(0.88341)

PV = $5,521,341.23

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