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25 June, 15:56

A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%. Show work

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  1. 25 June, 16:17
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    Answer is $6,079,058.25

    Explanation:

    This is a simple present value problem.

    Present value of annuity shows the worth of annual payments which is present.

    As per the given statement, grand prize of lottery is $10 million. This is payable over 20 years at $500,000 per year. The interest rate is 6%.

    To find the real worth of the grand prize, each $5 million payment must be "brought back" to their current value at a 6% per year rate.

    N = 20; PMT = 500,000; FV = 0; I = 6%; Payments in BEGIN mode.

    PV = Cash flow / (1+rate of return) to the power n

    PV will be addedc exponential power 20 times giving answer as $6,079,058.25

    Hence, PV = $6,079,058.25
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