Use a Financial Calculator Several years ago The Wall Street Journal reported th

Question

Use a Financial Calculator

Several years ago The Wall Street Journal reported that the winner of the Massachusetts State Lottery prize had the misfortune to be both bankrupt and in prison for fraud. The prize was $9,420,713 to be paid in 19 equal annual installments. (There were 20 installments but the winner had already received the first payment.) The bankruptcy court judge ruled that the prize should be sold off to the highest bidder and the proceeds used to pay off the creditors.

If the interest rate was 8%:

1) How much would you have been prepared to bid for the prize?

2) How much is the future value for the cash flow after 19 years?

Explanation / Answer

Price was $ 9,420,713 for 19 installments so for each installment it would be $ 495,827 (9,420,713/19).

There are total 20 installments and starting from beginning of the year.

1) So your first answer would be -

You have been prepared $ 5,257,550.78 to bid for the prize.

Solution:

Number of Periods (N) = 20

Interest Rate (I/Y) = 8%

Periodic Deposit (PMT) = $ 495,827

PMT Made at beginning of the year.

2) so your second answer would be -

Future value for the cash flow would be $ 2,269,017.47 after 19 years.

Solution:

Number of Periods (N) = 19

Interest rate (I/Y) = 8%

Periodic Deposit (PMT) = $ - 495,827

Present Value (PV) = $ - 495,827

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