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18 July, 01:45

You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $50,000 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?

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  1. 18 July, 02:52
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    The correct answer is $925,925.92.

    Explanation:

    According to the scenario, the given data are as follows:

    Payment = $50,000

    Increase rate = 2.5%

    Discount rate = 7.9%

    So, we can calculate the present value of your prize by using following formula:

    Present value = total payment / (discount rate - increase rate)

    = $50,000 / (7.9% - 2.5%)

    = $50,000 / 5.4%

    = $50,000 / 0.054

    = $925,925.92

    Hence the present value of prize is $925,925.92.
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