You just won the lottery and will receive $14,000 at the end of each of the...

You just won the lottery and will receive $14,000 at the end of each of the next 10 years. Your friend offers to give you a flat $100,000 for the 10 years' worth of income flows right now. If you expect a return of 7% on any surefire investment, how much do you think these lottery winnings are worth to you today? (FORMAT: XX,XXX.XX DO NOT INCLUDE A DOLLAR SIGN)

Solutions

Expert Solution

PRESENT VALUE OF LOTTERY = 98,330.14

P =	Periodic Payments
r =	rate of interest
n =	no of periods

PRESENT VALUE OF LOTTERY =	P [ 1 - ( 1 + r )^-n ]
	r

PRESENT VALUE OF LOTTERY =	14000* ( 1 - ((1 / (1 + 7%)^10)))
	7%

PRESENT VALUE OF LOTTERY =	6883.10991
	0.07

PRESENT VALUE OF LOTTERY =	98330.14

PRESENT VALUE OF AMOUNT FROM FRIEND = 702,358.15

P =	Periodic Payments
r =	rate of interest
n =	no of periods

PRESENT VALUE OF AMOUNT FROM FRIEND =	P [ 1 - ( 1 + r )^-n ]
	r

PRESENT VALUE OF AMOUNT FROM FRIEND =	100000* ( 1 - ((1 / (1 + 7%)^10)))
	7%

PRESENT VALUE OF AMOUNT FROM FRIEND =	49165.07079
	0.07

PRESENT VALUE OF AMOUNT FROM FRIEND =	702358.15

jeff jeffy answered 1 year ago

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