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Your friend just won the lottery. He has a choice of receiving $122,788 a year for the next 18 years or a lump sum today. The lottery uses a 8% discount rate. What would be the lump sum your friend would receive?

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Answer #1

Annual payment = $122,788
Number of payments = 18
Discount rate = 8%

Present value = $122,788/1.08 + $122,788/1.08^2 + .... + $122,788/1.08^18
Present value = $122,788 * (1 - (1/1.08)^18) / 0.08
Present value = $122,788 * 9.371887
Present value = $1,150,755.26

So, he will receive a lump sum payment of $1,150,755.26

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