Question

The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state's newest millionaire. By choosing the six winning numbers on last week's state lottery, Mr. Ormsby won the week's grand prize totaling $1.3 million. The State Lottery Commission indicated that Mr. Ormsby will receive his prize in 20 annual installments of $65,000 each. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1. If Mr. Ormsby can Invest money at a 7% rate of return, what is the present value of his winnings? (Enter your answer in dollars and not in millions of dollars.) Present value

Answer 1

Mr. Ormsby shall receive 20 instalments of each $ 65,000 from his winnings.

This amount of cash flows i.e. winnings of $ 65,000 each year has to be discounted to present value using discount rate of 7%.

Present value of future cash flows = Annuity * Present value annuity factor (rate,time)

Hence, present value of winnings              = 65,000 * Present value annuity factory (7%,20)

                                                                    = 65,000 * 10.59401

                                                          = $ 688,611 (rounded off)

The present value of his winnings is $ 688,611.

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