Question

You have just won the state lottery and have two choices for collecting your winnings. You can collect $100,000 today or receive $20,000 at the end of each year for the next seven years. A financial analyst has told you that you can earn 10% on your investments. Calculate the present value of both the options.

Answer 1

Answer:

$100,000 and $97,368

Explanation:

In this question we compare the cost between the two options available i.e shown below:

First options

Collect today for $100,000

Second options, the present value is  

= Annual cash flows × PVIFA factor for 10% at 7 years  

= $20,000 × 4.8684

= $97,368

So the present value of the first option is $100,00 0

And, for the second options it is $97,368