In: Finance
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 |
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.