1. You have just won a Colorado Lottery prize that will pay annual payments $7,573 forever....

1. You have just won a Colorado Lottery prize that will pay annual payments $7,573 forever. You would rather have a lump sum today rather than the future payments. If you wanted o discount those payments by 11.0%, the value of that prize in todays dollars would be $__.__.

Suppose that you were to receive $105 at the end of year one, $230 at the end of year 2, and $352 at the end of year three. If the discount rate was 10% annually, the value of those cash flows today would be $__._

If a bank loan for $139 had an APR of 11.3% and was to be paid back over 5 years, the annual payment would be $__.__.

Solutions

Expert Solution

1.Present value of perpetuity=Annual payments/discount rate

=7573/0.11

=$68845.45(Approx)

2.Present value=Cash flows*Present value of discounting factor(rate%,time period)

=105/1.1+230/1.1^2+352/1.1^3

=$550

3.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

139=Annuity*[1-(1.113)^-5]/0.113

139=Annuity*[1-0.585496332]/0.113

139=Annuity*3.66817405

Annuity=139/3.66817405

=139/3.66817405

=$37.89(Approx)

jeff jeffy answered 2 years ago

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