You have just won the lottery and will receive $610,000 in one year. You will receive...

You have just won the lottery and will receive $610,000 in one year. You will receive payments for 19 years, which will increase 5 percent per year. The appropriate discount rate is 12 percent.

Required:

What is the present value of your winnings?

Solutions

Expert Solution

Answer;

Present value = $6,157,548.77

Explanation;

Present value of growing annuity Formula;

First Payment = $610,000

Rate = 12%

Growth Rate = 5%

N = 19 years

So,

= $610,000/ 12% - 5% x [ 1 - (1+5%/1+12%)^19

= $610,000/ 7% x [ 1 - (1.05/1.12)^19]

= $8,714,285.71 x [ 1 - 0.293396]

= $8,714,285.71 x 0.706604

= $6,157,548.77

Cross check;

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