Question

In: Finance

The $40.0 million lottery payment that you have just won actually pays $1.6 million per year...

The $40.0 million lottery payment that you have just won actually
pays $1.6 million per year for 25 years. The interest rate is 10%.

If the first payment comes in 1 year, what is the present value of
the winnings?

What is the present value if the first payment comes
immediately?

(Do not round intermediate calculations. Enter your
answer in millions of dollars rounded to 2 decimal places.)

Expert Solution

A. Calculation of PV (Present Value) of winnings: (When first payment is received at the end of each year 1)

**Ordinary Annuity is when the cash Flows arises at the End of each year.

We know That,

[where,

PV = Present Value of Ordinary Annuity

CF = Annual Cash Flows = $ 1.6 million

PVAF = Present Value annuity factor

R = Rate of interest = 10%

n= Number of Years =25 years]

(using calculator)

PV = $ 14.52 millions

B. Calculation of PV (Present Value) of winnings: (When first payment is received at the today)

**Annuity Due is when the cash Flows arises at the beginning of each year.

We know That,

[where,

PV = Present Value of Annuity Due

CF = Annual Cash Flows = $ 1.6 million

PVAF = Present Value annuity factor

R = Rate of interest = 10%

n= Number of Years =25 years]

(using calculator)

PV = $ 15.98 millions

jeff jeffy answered 2 years ago

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