Question

You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 25 years and the payments will increase by 3.5 percent per year. If the appropriate discount rate is 7.5 percent, what is the present value of your winnings? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Present value

Answer 1

Present value = C{[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)]^t}

Present value = $1,000,000{[1/(0.075 – 0.035)] – [1/(0.075 – 0.035)] × [(1 + 0.035)/(1 + 0.075)]²⁵}

Present value = $15,311,932.70