You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $21,500 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent? and the answer is $925,925.92.
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Here’s The Correct Answer of this Question:
Explanation:
According to the scenario, the given data are as follows:
- Payment = $50,000
- Increase rate = 2.5%
- Discount rate = 7.9%
So, we can calculate the present value of your prize by using the following formula:
Present value = total payment / (discount rate – increase rate)
= $50,000 / (7.9% – 2.5%)
= $50,000 / 5.4%
= $50,000 / 0.054
= $925,925.92
Hence the present value of prize is $925,925.92.
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Question – You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $21,500 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?
Answer – $925,925.92.
