You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $60,000 and will be paid one year from today. Every year thereafter, the payments will grow by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?
| A. |
$1,111,111.11 |
|
| B. |
$999,999.67 |
|
| C. |
$1,350,000.00 |
|
| D. |
$1,222,222.50 |
|
| E. |
$888,888.22 |
The present value is computed as shown below:
= First payment / (discount rate - growth rate)
= $ 60,000 / (0.079 - 0.025)
= $ 1,111,111.11
So, the correct answer is option A.
Feel free to ask in case of any query relating to this question
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