Question

Your friend just won the lottery. He has a choice of receiving $50,000 a year for the next 20 years or a lump sum today. The lottery uses a 15% discount rate. What would be the lump sum amount your friend would receive

Answer 1

Answer:

$312,966.57

Explanation:

The lump sum payment that my friend will receive shall be determined through the present value of annuity formula which is given as follows:

Lump sum payment=Present value of annuity=R[(1-(1+r)^-n)/r]

In the given question

R=Amount that my friend will receive per year=$50,000

r=Discount rate=15%

n=number of years for which the payment will be received=20

Lump sum payment=Present value of annuity=$50,000[(1-(1+15%)^-20)/15%]

                                                                           =$312,966.57