Question

You just won a national sweepstakes! For your prize, you opted to receive never-ending payments. The first payment will be $12,500 and will be paid one year from today. Every year thereafter, the payments will increase by 3.5 percent annually. What is the present value of your prize at a discount rate of 8 percent?

Answer 1

Answer:

The present value of your prize at a discount rate of 8 percent is  $277,777.78

Explanation:

In order to calculate the present value of your prize at a discount rate of 8 percent we would use the DDM to compute the present value today as follows:

   

As per ddm model value today = Expected earning next year / (required rate - growth rate)  

expected cash flow after 1 year =$12,500      

Growth = 3.50%      

required rate =8%      

Therefore, Value today =$12,500/(8%-3.5%)

Value today = $277,777.78    

The present value of your prize at a discount rate of 8 percent is  $277,777.78