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?

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