Question

You have just won $20,000 in the state lottery, which promises to pay you $1,000 (tax free) every year for the next twenty years. The interest rate is 5%. In reality, you receive the first payment of $1,000 today, which is worth today. (Round your response to the nearest penny) The value of the second $1,000 payment is worth Stoday (Round your response to the nearest penny) Your total lottery winnings are actually worth $20,000 to you today

Answer 1

(1) First payment is worth $1,000.00 today (Present value at time 0 = Non-discounted cash flow at time 0).

(2) Second payment is worth $952.38 today (Present value = Future value / (1 + Interest rate) = $1,000 / 1.05).

(3) Total lottery is worth less than $20,000 today (Present value = $1,000 x P/A(5%, 20) = $1,000 x 12.462 = $12,462)