A local magazine is offering a $5,000 grand prize to one lucky winner. The prize will be paid in five annual payments of $1,000 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 8 percent on your money

The prize is worth $3,992.71

Explanation:

Giving the following information:

Cash flow = $1,000 per year for 5 years

Interest rate = 8%

To calculate the value of the prize today, first, we need to calculate the final value:

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

A = annual payment

FV = {1,000*[ (1.08^5) - 1]}/0.08

FV = $5,866.60

Now, the present value:

PV = FV / (1+i) ^n

PV = 5,866.6 / (1.08^5)

PV = $3,992.71