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21 February, 18:42

Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the form of an annuity due. What is the present value of this stream of payments if money can earn 7 percent annual interest?

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  1. 21 February, 19:12
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    PV = $529,700.71

    Explanation:

    Giving the following information:

    Cash flow = $50,000

    the number of years = 20

    Interest rate = 7%

    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 = annual pay

    FV = {50,000*[ (1.07^20) - 1} / 0.07

    FV = $2,049,774.62

    Now, we can calculate the present value.

    PV = FV / (1+i) ^n

    PV = 2,049,774.62/1.07^20

    PV = $529,700.71
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