You have just won $20,000 in the state lottery, which promises to pay you $1,000 (tax free) every year for the next twenty years. the interest rate is 5%. in reality, you receive the first payment of $1,000 today, which is worth $

Question

Liberty Welch

Business

22 May, 12:40

You have just won $20,000 in the state lottery, which promises to pay you $1,000 (tax free) every year for the next twenty years. the interest rate is 5%. in reality, you receive the first payment of $1,000 today, which is worth $

+5

Answers (1)

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Rhys Salas · Answer 1

The current value of the payment which is $1000 will be:

A=P (1+r/100) ^-n

P=1000

r=5 %

n=1

A=1000 (1+5/100) ^-1

A=1000/1.05

A=$952.38

The first payments of $1000 is worth $952.38 today. The value of the second $1000 is worth:

A=1000 (1+0.05) ^-2=907.02

today