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11 November, 12:12

Hooray! You won the lottery, but you have a choice of taking the $20,000 per year for the next 20 years or taking a lump settlement today. What would be the minimum amount you would accept today if you decide that 8% is a reasonable discount rate

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  1. 11 November, 12:25
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    The minimum value is $196,362.95

    Explanation:

    Giving the following information:

    Cash flow = $20,000

    The number of years = 20 years

    Interest rate = 8%

    First, we need to calculate the future value of the cash flows. We will use the following formula:

    FV = {A*[ (1+i) ^n-1]}/i

    A = cash flow

    FV = {20,000*[ (1.08^20) - 1]} / 0.08

    FV = $915,239.29

    Now, we can calculate the present value. The present value is the minimum value yo accept.

    PV = FV / (1+i) ^n

    PV = 915,239.29 / 1.08^20

    PV = $196,362.95
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