You just won $1,000,000 in the lottery. This lottery will pay you $1 a year for...

You just won $1,000,000 in the lottery. This lottery will pay you $1 a year for a million years. Using a martket discount rate of 5% compound annually, what is the current value of this prize?

$20

$67

$24.67

$16.66

$12

Solutions

Expert Solution

Option (a) is correct

Here, since the payments will occur for million years or forever, so it will be called as a perpetuity. We need to find the present value of perpetuity. The formula for present value of perpetuity is:

Present value of Perpetuity = Cash inflows per period / Discount rate

Given: Cash inflows per period = $1, Discount rate = 5%

Putting the given values in the above formula. we get,

Present value of perpetuity = $1 / 5% = $20

jeff jeffy answered 2 years ago

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