You have just won a lottery prize of $1 000 000 collectible in 10 yearly installments...
You have just won a lottery prize of $1 000 000 collectible in 10 yearly installments of $ 100 000 starting today. Why is this prize not really $ 1 000 000 ? What is it really worth today if money can be invested at 10 percent annual interest, compounded monthly?
Homework Answers
Solution
Yes,the prize is not really $1,00,000.It's real worth can be obtained by calculating the present value of all the future payments i.e., the present value of all the 10 yearly payments with an interest rate of 10% p.a compounded monthly.
Therefore,the present
value will be lesser than $1,00,000 meaning that the present value
of all future payments i.e.,$1,00,000 per year will be equal to
$9,90,403.
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