You just won a national sweepstakes! For your prize, you opted to receive never-ending payments. The first payment will be $12,500 and will be paid one year from today. Every year thereafter, the payments will increase by 3.5 percent annually. What is the present value of your prize at a discount rate of 8 percent?

Question

Joy Barrett

Business

7 May, 06:37

You just won a national sweepstakes! For your prize, you opted to receive never-ending payments. The first payment will be $12,500 and will be paid one year from today. Every year thereafter, the payments will increase by 3.5 percent annually. What is the present value of your prize at a discount rate of 8 percent?

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Answers (1)

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Anthony Ballard · Answer 1

The present value of your prize at a discount rate of 8 percent is $277,777.78

Explanation:

In order to calculate the present value of your prize at a discount rate of 8 percent we would use the DDM to compute the present value today as follows:

As per ddm model value today = Expected earning next year / (required rate - growth rate)

expected cash flow after 1 year = $12,500

Growth = 3.50%

required rate = 8%

Therefore, Value today = $12,500 / (8%-3.5%)

Value today = $277,777.78

The present value of your prize at a discount rate of 8 percent is $277,777.78