Suppose you win the Publishers Clearinghouse $15 million sweepstakes. The money is paid in equal annual...

Suppose you win the Publishers Clearinghouse $15 million sweepstakes. The money is paid in equal annual installments of $600,000 over 25 years. Assume the appropriate discount rate is 6%, how much is the sweepstakes actually worth today?

	A.	4.67m
	B.	5.67m
	C.	6.67m
	D.	7.67m
	E.	8.67m

Solutions

Expert Solution

Solution:-

Annuity PV factor (end of the year) = P * [1-(1+r)^-n] / r

Given,

Principal = $600,000

rate = 6% or 0.06

n = 25

Present value of Annuity = $600,000 * [1-(1+0.06)^-25] / 0.06

= $600,000 * [1-(1.06)^-25] / 0.06

= $600,000 * 0.767001 / 0.06

= $600,000 * 12.7833561

= $7,670,013.66 or $7.67 million approx

Therefore the sweepstakes actually worth today is $7.67 million which is option D.

jeff jeffy answered 2 years ago

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